Question

The same amount of principal is invested in different accounts earning the same interest rate. Which of the following accounts would have the greatest accumulated value at the end of one year?
a.
An account earning no interest
b.
An account earning simple interest
c.
An account earning interest compounded annually
d.
An account earning interest compounded daily

Answer 1

The correct option is D.
There are two types of interest, simple interest and compound interest. The simple interest on a loan is usually paid over a certain period at a fixed percentage of the amount borrowed. Compound interest on the other hand can be describes as interest paid on interest. This is because, the calculation of compound interest involves adding the interest accrues on a loan to the principal and then calculating interest on the whole amount. The interest yielded is continuously added to the principal and new principal amount is generated every time the interest is added.
Obviously, it can be seen that calculating compound interest on a daily basis will yield the greatest amount of money compare to other options given.