Question

Find the APY of the following accounts to determine which one gives you a higher retum on your investment: a. (4 points) An account that bears 3.2% interest compounded continuously b. (4 points) An account that bears 3.21% interest compounded quarterly c. (2 points) Which of these two accounts offers a higher return on investment

Answer 1

Answer:

(a) Given that for the first account, interest rate (r)=3.2% and n=365 (compounded continuously)

We know that Annual Percentage Yield, $APY=(1+\frac{r}{n})^{n}-1$

Thus plugging the above value we get, $APY=(1+\frac{0.032}{365})^{365}-1=0.033$

i.e. APY=3.3%

(b) Given for the first account, interest rate (r)=3.21% and n=4 (compounded quarterly)

Thus plugging the above value we get the Annual Percentage Yield, $APY=(1+\frac{0.0321}{4})^{4}-1=0.032$

i.e. APY=3.2%

All the calculations showed in the following table:

Clipboard Font fx =(1+C3/D3) D3-1 D E A B C Option Account 1 Account 2 r 0.0320 0.0321 n APY 3 65 0.033 40.0321

(c) Thus the first account offers higher rate on investment (3.3% > 3.2%).