Question

Which would produce a larger balance: an annual interest rate of 8.05% compounded monthly or an annual interest rate of 8% compounded continuously? Explain.

Answer 1

8% compounded monthly has higher yield

Explanation:

Here, we want to compare which of the two options would give a higher yield

An interest rate of 8% compounded monthly or 8% compounded annually

Let us say we are looking at a time frame of two years

If compounded monthly, since there are 12 months in a year, there would have been a compounding of 12 * 2 = 24 times

While if it is annual, we would have only twice

The higher the number of times we compound, the more the return