Question

Odette has two investments that she purchased at the same time. Investment 1 cost $10,000 and earns 4% interest each year. Investment 2 cost $8000 and earns 6% interest each year. Instead of calculating 4% interest for one year, suppose the interest for Investment 1 was calculated every day at a rate of (4/365)%. This is called daily compounding. Would Odette earn more, the same, or less using this daily method for one year? Provide an example to show your thinking.

Answer 1

Answer:

$10408.08>$10400

She will earn more using the daily compounding method.

Step-by-step explanation:

Investment 1 cost $10,000 and earns 4% interest each year.

If interest was paid once a year

Amount = P(1+r)ⁿ

= 10000(1+0.04)

=10000(1.04)

=$10400

If the interest was compounded daily

Amount = P(1+r/n)ⁿᵗ

=10000(1+0.04/365)³⁶⁵

=$10408.08

Since $10408.08>$10400, it means Odette will earn more using the daily method for one year.