Question

You have $500 that you would like to invest for one year. You have 2 choices: savings account A which earns 8.3% compound annually or savings account B which earns 8% compounded semi-annually. Which would you choose? A. Savings Account A B. Savings Account B C. You are indifferent between Savings Account A and Savings Account B.

Answer 1

Compounding at regular intervals shall have its increasing effect of the value.The compounding can be observed either yearly or half yearly or quarterly or monthly or fortnightly or weekly or daily;

The lower the frequency of compounding, the higher the multiplier effect and higher the value, subject all the factors being same.

In the given case, the investment value is $ 500; Rate of Interest if 8.3% and 8% respectively; Let us assume period of 1 year:

Account A :If compounded annually, then the value shall be: $ 500 * (1+8.3%) = $ 541.50

Account B :If compounded semi annually, then the value shall be: $ 500 *(1+8%/2)^2 = $ 540.80

It is to choose Account A, as the value is a bit higer;