Would you rather have a savings account that pays 5% interest compounded semiannually or one that pays 5% interest compounded daily? Explain.
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Would you rather have a savings account that pays 5% interest compounded semiannually or one that pays 5% interest compounded daily? Explain. |
Explanation
In case of compounding, interest is earned on the principal amount as well as the accumulated interest from previous periods. When compounding is done more number of times in a year, interest earned increases as after a specified time period, interest will be calculated on the previous interest.
Therefore, investing in a savings account that pays 5% interest compounded daily is better than the one with semiannual compounding.
Verified Answer
The savings account that pays 5% interest compounded daily
would be preferred to the one that pays 5% interest compounded semiannually.
The reason behind it is that when there are more number of periods in a year in which the sum is being compounded, the more number of times the interest over interest will be charged on the sum.
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