Question

Suppose Carla has $7000 to invest. Which investment yields the greater return over 4 years: 7% compounded quarterly or 6.85% compounded monthly

Answer 1

Answer:

The option with the quarterly compounding provides a higher future value.

Explanation:

Giving the following information:

Initial investment= $7,000

Number of years= 4 years

To calculate the future value, we need to use the following formula:

FV= PV*(1+i)^n

Quarterly compounding:

Interest rate (i)= 0.07/4= 0.0175

n= 4*4= 16

FV= 7,000*(1.0175^16)

FV= $9,239.51

Monthly compounding:

i= 0.0685/12= 0.00571

n= 4*12= 48

FV= 7,000*(1.00571^48)

FV= $9,200.07

The option with the quarterly compounding provides a higher future value.