Question

Suppose Carla has $12,000 to invest. Which investment yields the greater return over 2 years: 9% compounded quarterly or 8.85% compounded monthly?

A) The rate of 8.85% compounded monthly is better.

B) The rate of 9% compounded quarterly is better.

C) They are the same.

Answer 1

B) The rate of 9% compounded quarterly is better

Step-by-step explanation:

The effective annual rate at 8.85% compounded monthly is ...

... (1 +0.0885/12)^12 -1 ≈ 9.218%

The effective annual rate at 9% compounded quarterly is ...

... (1 +0.09/4)^4 -1 ≈ 9.308% . . . . . . larger than 9.218%

The higher rate compounded less often is better.

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The rates would be nearly equivalent (within $1 over 2 years) if the rate compounded monthly were about 8.93% instead of 8.85%