Question

An investment banker is responsible for investing a customer’s money into the greatest interest earning account. The banker has the following options for his customer’s investment: Account A: interest rate = 4.8% term of investment = 10 years interest compounded monthly Account B: interest rate = 4.9% term of investment = 10 years interest compounding continuously Which account, A or B, will earn the customer the greatest amount of interest on his $150,000 investment? In your final answer, include all of your calculations.

Answer 1

The more often an interest rate is compounded, the better the return it provides. Continuous compounding at 4.9% would give a better return than monthly compounding at the same rate. Monthly compounding at 4.9% would give a better return than monthly compounding at 4.8%.

Account B will earn the customer the greatest amount of interest.

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The question is a qualitative one; no calculations are necessary. One simply needs to observe that 4.9 > 4.8.

(If the numbers were reversed, monthly compounding at 4.9% would give a better return than continuous compounding at 4.8%. A calculation is needed in order to come to that conclusion.)