Question

1. When Gavin deposited $2000 into his savings account he was given the option of earning 9% compounded annually or 2.5% compounded quarterly. What advice would you give Gavin? Explain your reasoning.
a. Which option would you advice Gavin to take?

b. Explain your reasoning.

Answer 1

Hello there! So, the formula for compound interest is P(1 + r/n)^nt. P = principal, r = rate, n = number of times compounded per year, and t = time in years. 

a. Just by looking at the numbers, I would say that Gavin should take the first option of 9% compound interest annually.

b. I say this, because you're gonna earn a lot more. Just by solving the question for the amount in 5 years for each account, the first opinion will earn you $3,077.35, and the other option will only give you $2,265.42 in 5 years. Keep in mind that compounding quarterly means 4 times per year. With a low interest rate, it's no surprise that the first option would be a better choice.