Question

Savings account A and savings account B both offer APRS of 2%, but savings

account A compounds interest quarterly, while savings account B
compounds interest annually. Which savings account offers the higher APY?
A. Savings account A, because it has more compounding periods per
year
B. Savings account B, because it has fewer compounding periods per
year
C. Savings account A, because it has fewer compounding periods per
year
D. Savings account B, because it has more compounding periods per
year

Answer 1

The answer is A

Explanation:

The formula for annual percentage yield (APY) is:

APY = (1 + APR/n)^n - 1

where APR is the annual percentage rate, and n is the number of compounding periods per year.

For savings account A, APR = 2%, and it compounds interest quarterly, so n = 4. Therefore, its APY is:

APY_A = (1 + 0.02/4)^4 - 1 ≈ 0.0202 or 2.02%

For savings account B, APR = 2%, and it compounds interest annually, so n = 1. Therefore, its APY is:

APY_B = (1 + 0.02/1)^1 - 1 = 0.02 or 2%

Comparing the two APYs, we can see that savings account A has a slightly higher APY than savings account B. Therefore, the correct answer is:

A. Savings account A, because it has more compounding periods per year