Question

An investor considers two investment bonds one $8000 bond offer 6% interest compounded annually for 10 years another 8000 bond offer 6% interest compounded monthly for 10 years how much more interest with the investor earn from the bond with monthly compounding

Answer 1

Answer:the investor will make $185 more

Explanation:

The formula for compound interest is

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

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

Considering the bond that is being compounded annually,

The initial amount is $8000, so

P = 8000

It was compounded annually. This means that it was compounded once in a year. So

n = 1

The rate at which the principal was compounded is 6%. So

r = 6/100 = 0.06

It was compounded for 10 years. So

t = 10 years

Therefore

A = 8000 (1+0.06/1)^1×10

A = 8000(1.06)^10= $14327

Considering the bond that is being compounded quarterly,

P = 8000

It was compounded quarterly. This means that it was compounded 4 times in a year. So

n = 4

The rate at which the principal was compounded is 6%. So

r = 6/100 = 0.06

It was compounded for 10 years. So

t = 10 years

Therefore

A = 8000 (1+0.06/4)^4×10

A = 8000(1.015)^40= $14512

The difference between both investments is 14512 - 14327 = $185