The First City Bank pays 7 percent interest, compounded annually, on time

deposits. The Second City Bank pays 6.5 percent interest, compounded quarterly.

a. Based on effective interest rates, in which bank would you prefer to deposit

your money?

b. Assume that funds must be left on deposit during the entire compounding

period to receive any interest. Could your choice of banks be influenced by

the fact that you might want to withdraw your funds during the year as opposed to at the end of the year?