Would you rather have a savings account that pays 5% interest compounded semiannually or one that pays 5% interest compounded daily? Explain.
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.
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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