58.2k views
0 votes
How much better is the return on a 6% yearly interest rate investment that is compounded 6 times per year as opposed to compounded yearly?

User Daramasala
by
8.3k points

1 Answer

5 votes

Answer: it is 1.004 times better

Explanation:

Let $p represent the Initial amount invested into the account. Assumimg p = $1000

Let t represent the number of years for which $p was invested. Assuming t = 3 years

r = rate of investment = 6% = 6/100 = 0.06

Let A represent the total amount in the account at the end of t years.

The formula for compound interest is

A = P(1+r/n)^nt

1) if the investment is compounded 6 times per year, then

n = 6

A = 1000(1+0.06/6)^6 × 3

A = 1000(1.01)^18

A = 1196.15

2) if the investment is compounded yearly, then

n = 1

A = 1000(1+0.06/1)^1 × 3

A = 1000(1.06)^3

A = $1191.016

Therefore,

1196.15/1191.016 = 1.004

The investment that is compounded 6 times per year is 1.004 times better that that compound yearly at the same rate and time

User Pinky
by
7.3k points

No related questions found

Welcome to QAmmunity.org, where you can ask questions and receive answers from other members of our community.

9.4m questions

12.2m answers

Categories