Question

Use the compound interest formulas A = Pe^rt and A = P (1+rn)^nt to solve. Suppose that you have $11,000 to invest. Which investment yields the greater return over 10 years: 6.25% compounded continuously or 6.3% compounded semiannually? Show your work.

Answer 1

To evaluate the investment that will yield maximum return, we compute the future values of the investment.
Given the compound interest formula for continuously compounded rate:
A=Pe^rt
where:
P=principle, r=rate, t=number of terms
P=$11000, r=6.25, t=1
thus
A=11000e^(0.0625*1)
A=$11,709.44

A=P(1+r)^nt
P=$11000, r=6.3%, n=2, t=1
Thus
A=11000(1+0.063)^2
A=$12,429.659
From the calculations we conclude that the second investment is the best option because it is yielding high returns.