Thinking Mathematically (6th Edition)

Published by Pearson
ISBN 10: 0321867327
ISBN 13: 978-0-32186-732-2

Chapter 8 - Personal Finance - 8.4 Compound Interest - Exercise Set 8.4 - Page 522: 57

Answer

The account paying 4.5% interest compounded semiannually is a better investment.

Work Step by Step

This is the formula we use when we find the effective annual yield $Y$: $Y = (1+\frac{r}{n})^{n}-1$ $Y$ is the effective annual yield $r$ is the stated interest rate $n$ is the number of times per year the interest is compounded We can find the effective annual yield when the 4.5% interest is compounded semiannually. $Y = (1+\frac{r}{n})^{n}-1$ $Y = (1+\frac{0.045}{2})^{2}-1$ $Y = 0.0455$ The effective annual yield is 4.55% We can find the effective annual yield when the 4.4% interest is compounded daily. $Y = (1+\frac{r}{n})^{n}-1$ $Y = (1+\frac{0.044}{360})^{360}-1$ $Y = 0.0450$ The effective annual yield is 4.50% The account paying 4.5% interest compounded semiannually is a better investment.
Update this answer!

You can help us out by revising, improving and updating this answer.

Update this answer

After you claim an answer you’ll have 24 hours to send in a draft. An editor will review the submission and either publish your submission or provide feedback.