Is it better to invest at an annual rate of 4.2% compounded monthly or 6.8% compounded annually.

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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.

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