Question

You are planning to save your Christmas bonuses from work and are comparing savings accounts: Account A compounds semiannually while account B compounds monthly. If both accounts have the same quoted annual rate of interest and you place only the bonuses in the account, you should choose __________________________.

Select one:

a. either account, since both quote the same rate of interest

b. account A because it has a higher APR

c. account B because it is compounded more often

d. account A because you will pay less in taxes

e. account B because it has a higher APR

Answer 1

c. account B because it is compounded more often

Future value of investment is calculated as: F= P*(1+r/n)^(n*t); where F is Future value of the investment, P is Present value of the investment, r is the annual interest rate, t is the number of years and n is the number of times compounded.

From the formula, Future value of investment increases with n, which is the number of times interest is compounding So, Account B which is compounding more often should be chosen.