Question

How much better is the return on a 6% yearly interest rate investment that is compounded 6 times per year as opposed to compounded yearly?

Answer 1

Answer: it is 1.004 times better

Step-by-step explanation:

Let $p represent the Initial amount invested into the account. Assumimg p = $1000

Let t represent the number of years for which $p was invested. Assuming t = 3 years

r = rate of investment = 6% = 6/100 = 0.06

Let A represent the total amount in the account at the end of t years.

The formula for compound interest is

A = P(1+r/n)^nt

1) if the investment is compounded 6 times per year, then

n = 6

A = 1000(1+0.06/6)^6 × 3

A = 1000(1.01)^18

A = 1196.15

2) if the investment is compounded yearly, then

n = 1

A = 1000(1+0.06/1)^1 × 3

A = 1000(1.06)^3

A = $1191.016

Therefore,

1196.15/1191.016 = 1.004

The investment that is compounded 6 times per year is 1.004 times better that that compound yearly at the same rate and time