Question

Thomas wants to save money for college, and is considering two different savings accounts in which to hold his money. The first account has an interest rate of 9%, compounded semi-annually. The second account has an interest rate of 5%, and is compounded monthly. If he deposits $5,000.00 in one of the accounts, and intends to let the money sit in the account for 8 years, which account will have the higher balance at the end of 8 years?

Answer 1

9% account

Explanation:

Even if a 5% account is compounded continuously, the equivalent annual rate will only be e^.05 -1 ≈ 5.13%.

The 9% account will have an equivalent annual interest rate of at least 9%, which is more than 5.13%

The 9% account will have a higher balance.