Question

Rank each interest rate and compounding scheme in order from the highest yield to the lowest yield. 2% compounded quarterly, 2% compounded monthly, 2% compounded annually.

a) 2% compounded annually, 2% compounded quarterly, 2% compounded monthly
b) 4% compounded quarterly, 2% compounded monthly, 2% compounded annually
c) 4% compounded monthly, 4% compounded quarterly, 4% compounded annually

Answer 1

To rank the interest rates and compounding scheme, 2% compounded monthly has the highest yield, followed by 2% compounded quarterly, and 2% compounded annually.

Step-by-step explanation:

To rank the interest rates and compounding scheme in order of highest yield to lowest yield, we need to understand how each compounding scheme affects the overall yield.

1. 2% compounded annually: This means that the interest is added once a year. At the end of the year, the interest is calculated on the original amount and added to the balance. This scheme has the lowest yield because the interest is only added once in a year.
2. 2% compounded quarterly: In this scheme, the interest is added four times a year. At the end of each quarter, the interest is calculated on the new balance and added. This scheme has a higher yield compared to compounded annually but lower than the next one.
3. 2% compounded monthly: This scheme has the highest yield among the three. The interest is added twelve times a year, at the end of each month. The interest is calculated on the new balance and added. This scheme gives the highest overall yield due to more frequent compounding.