Answer
It is better to invest at a rate of 6.85% compounded daily.
Work Step by Step
This is the formula we use when we find the effective annual yield $Y$:
$Y = (1+\frac{r}{n})^{n}-1$
$Y$ is the effective annual yield
$r$ is the stated interest rate
$n$ is the number of times per year the interest is compounded
We can find the effective annual yield when money is invested at a rate of 7% compounded annually.
$Y = (1+\frac{r}{n})^{n}-1$
$Y = (1+\frac{0.07}{1})^{1}-1$
$Y = 0.07$
The effective annual yield is 7.0%
We can find the effective annual yield when money is invested at a rate of 6.85% compounded daily.
$Y = (1+\frac{r}{n})^{n}-1$
$Y = (1+\frac{0.0685}{360})^{360}-1$
$Y = 0.0709$
The effective annual yield is 7.1%
It is better to invest at a rate of 6.85% compounded daily.
