Which is the better choice: $1000 deposited for a year at a rate of 5% compounde

Question

Which is the better choice: $1000 deposited for a year at a rate of 5% compounded quarterly or at a rate of 4.9999% compounded monthly? A. O B. C. The rate of 4.9999% compounded monthly is better. The rate of 5% compounded quarterly is better. They are the same.

Explanation / Answer

Dear Student Given Option 1 P = 1000 $ r = 5% T = 1 year (Compounded Quarterly) => n = 4 Amount = P (1 + r/n)^nT = 1000*(1+0.05/4)^4 = 1050.945337 Option 2 P = 1000 $ r = 5% T = 1 year (Compounded Monthly) => n = 12 Amount = P (1 + r/n)^nT = 1000*(1+0.049999/12)^12 = 1051.160851 Clearly with Option2 i.e. 4.9999% compounded monthly, we get a better return , Hence Option2 is a better choice Answer Choice A

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