The options for investment available are an annual rate of interest of 4.2% compounded monthly or an annual rate of interest of 6.8% compounded annually.

In the former case, the monthly rate of interest is 4.2/12 %. An amount of $100 deposited for one year is increased to $100*(1+.042/12)^12 = 104.28

In the latter case, an amount of $100 is increased to $106.8 in a year.

This shows that a difference in interest rate of 2.6% cannot be accommodated for by compounding monthly instead of compounding annually.

**It is better to invest at an interest rate of 6.8% compounded annually.**

## We’ll help your grades soar

Start your 48-hour free trial and unlock all the summaries, Q&A, and analyses you need to get better grades now.

- 30,000+ book summaries
- 20% study tools discount
- Ad-free content
- PDF downloads
- 300,000+ answers
- 5-star customer support

Already a member? Log in here.

Are you a teacher? Sign up now