Question

Fran Smith has two investment opportunities. The interest rate for both investments is 20%. Interest on the first investment will compound annually while interest on the second will compound quarterly. Which investment opportunity should Fran choose?

Answer 1

Fran should choose the second investment opportunity because it compounds quarterly, resulting in a higher growth rate.

Step-by-step explanation:

To determine which investment opportunity Fran should choose, we need to compare the compounding frequencies. The first investment will compound annually while the second investment will compound quarterly.

When interest is compounded more frequently, the investment grows faster. In this case, the second investment that compounds quarterly will have a higher growth rate compared to the first investment that compounds annually. Therefore, Fran should choose the second investment opportunity.

Answer 2

Fran should choose that which compounds quarterly

Step-by-step explanation:

In Compound Interest investment, the interest at the end of the compounding period is added to form a new base capital.

If this is done every 3 months, the principal at the beginning of each quarter increases while in annual compounding, the interest is added at the end of the year.

Generally, for investment, the more frequent is it compounded the better. On the other hand, less frequent compounding is preferred for borrowers.