Final answer:
The investment compounding annually will earn the lowest total interest in the first year because interest is added to the principal less frequently compared to monthly, semiannually, or quarterly compounding periods.
The correct option is a. Annually
Step-by-step explanation:
Among the options for compounding periods—annually, monthly, semiannually, quarterly—the one that would earn the lowest total interest in the first year is the one that compounds annually. When the compounding is done less frequently, less interest is added to the principal within the year, resulting in a slower growth of the investment. With annual compounding, interest is added to the principal once per year, whereas, with monthly, semiannual, or quarterly compounding, interest is calculated and added more often, leading to a higher amount due to compound interest.
For example, if an investment has an annual interest rate and is compounded monthly, the principal will grow faster due to interest being added each month and then that interest earning interest in subsequent months. This is why savings accounts typically pay a lower interest rate compared to CDs; the more frequent access to the funds (liquidity) typically comes with a trade-off of lower interest earnings.
Understanding how compounding frequency affects total interest earned is important when evaluating savings and investment options.
The correct option is a. Annually