Question

Suppose Carla has $7000 to invest. Which investment yields the greater return over 4 years: 7% compounded quarterly or 6.85% compounded monthly?

a. They are the same.
b. The rate of 7% compounded quarterly is better.
c. The rate of 6.85% compounded monthly is better.

Answer 1

The correct answer is B. The rate of 7% compounded quarterly is better.

Explanation:

In the case of investment at 7% compounded quarterly, the final result after 4 years of investment arises from the following calculation:

X = 7000 x (1 + 0.7 / 3) 4x3

X = 9,232.16

Therefore, after 4 years of investment, the amount in the account would be $ 9,232.16.

In turn, in the case of the investment at 6.85% compounded monthly, the final result after the same investment period arises from the following calculation:

X = 7000 x (1 + 0.685 / 12) 4x12

X = 9,199.33

Thus, in this case, the amount in the account after 4 years of investment would be $ 9,199.33.