Investment A and B both pay interest of 12% per year. Investment A compounds mon
ID: 2823680 • Letter: I
Question
Investment A and B both pay interest of 12% per year. Investment A compounds monthly. Investment B compounds quarterly. You will deposit $1,000 into the account you choose. All else equal, which of the following is true? a. You should choose investment A because it will have the higher present value. b. You should choose investment A because it will have the higher future value. c. You should choose Investment B because it will have the higher present value. d. You should choose Investment B because it will have the higher future value.
Explanation / Answer
Correct option is > b. You should choose Investment A because it will have the higher future value.
As this is investment we should look for higher future value the effective rate for investment A is higher because it is compounding monthly. The monthly compounding of 12% is equal to effective interest of 12.68% whereas B has quarterly compounding hence its effective rate will be 12.55%
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