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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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