Question

All else equal, more compounding periods per year results in which of the following?

1) Higher interest rate
2) Lower interest rate
3) No change in interest rate
4) Cannot be determined

Answer 1

More compounding periods per year result in a higher interest rate.

Step-by-step explanation:

When it comes to compounding interest, more compounding periods per year result in a higher interest rate. This is because compounding more frequently allows the interest to accumulate at a faster rate.

For example, let's say you have $1,000 invested at a 5% interest rate. If interest is compounded annually, you would earn $50 in interest at the end of the year. However, if interest is compounded quarterly (4 times per year), you would earn $51.62 in interest at the end of the year. The more frequent compounding increases the total amount of interest earned.

Therefore, the correct answer is 1) Higher interest rate.