Question

Determine which is the better investment: compounded semiannually or compounded quarterly. Round your answers to decimal places.

Answer 1

Answer:

the numbers are missing, so I looked for a similar question and found:

Determine which is the better investment: 5.22% compounded semiannually or 5.24% compounded quarterly. Round your answers to 2 decimal places.

• effective interest rate for semiannual compounding = (1 + 5.22%/2)² - 1 = 5.29%
• effective interest rate for quarterly compounding = (1 + 5.24%/4)⁴ - 1 = 5.34%

Compounded quarterly is a better investment than compounded semiannually

Explanation:

The shorter the compounding period, the more interests received (or paid if it is a loan) and the nominal interest rate is the same:

E.g. lets assume that the nominal interest rate is 10% per year:

• effective interest rate for annual compounding = 10%
• effective interest rate for semiannual compounding = (1 + 10%/2)² - 1 = 10.25%
• effective interest rate for quarterly compounding = (1 + 10%/4)⁴ - 1 = 10.38%
• effective interest rate for monthly compounding = (1 + 10%/12)¹² - 1 = 10.47%