A bank advertises it pays 4% annual interest, compounded daily, on savings accounts, provided the money is left in the account for 5 years. What is the effective annual interest rate

effective annual rate= 0.04096 = 4.096%

Explanation:

Giving the following information:

Annual interest rate= 4% compounded daily

Number of periods= 365 days

To calculate the effective annual interest rate, first, we need to determine the nominal daily rate:

nominal daily rate= 0.04/365= 0.00011

Now, using the following formula, we calculate the effective annual rate:

effective annual rate= (1+nominal daily rate)^365 - 1

effective annual rate= (1.00011^365) - 1

effective annual rate= 0.04096 = 4.096%

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