Question

3. Alexander deposited money into his retirement account that is compounded annually at an interest rate of 7%. Alexander thought the equivalent quarterly interest rate would be 2%. Is Alexander correct? If he is, explain why. If he is not correct, state what the equivalent quarterly interest rate is and show how you got your answer.

Answer 1

The equation for compound interest is: 


Where r is the interest rate and n is the number of times per year it's applied. Annually n = 1 and 7% interest r = 0.07 The quarterly rate 2% is already quartered 0.02 = r/n . 


You can see that Alexander is incorrect. A quarterly compound interest rate of 2% will accrue more interest than a 7% compound annual interest rate. 


1.7% compound quarterly Hope this helps:)