Assume Julian has a choice between two deposit accounts. Account A has an annual percentage rate of 7.55 percent but with interest compounded monthly. Account B has an annual percentage rate of 7.45 percent with interest compounded continuously. Which account provides the highest effective annual return? A. Account A B. Account B C. Both provide the same effective annual return. D. We don't have sufficient information to make a choice.

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Business

Ms. Congeniality

22 April, 19:07

Assume Julian has a choice between two deposit accounts. Account A has an annual percentage rate of 7.55 percent but with interest compounded monthly. Account B has an annual percentage rate of 7.45 percent with interest compounded continuously. Which account provides the highest effective annual return? A. Account A B. Account B C. Both provide the same effective annual return. D. We don't have sufficient information to make a choice.

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Howard Fowler · Answer 1

The correct answer is letter "A": Account A.

Explanation:

Compound interest is the interest an investor earns on the original investment plus all the interest earned on the interest that has accumulated over time. It is also called interested on interested. The frequency of compounding could be scheduled from daily to annually. The more frequent the compound interest is set, the most beneficial it is for the investor.

In that sense, account A will provide Julian with the highest annual return since it gives him a compound interest on a monthly basis v. annually with account B.