Question

Savings account A and savings account B both offer APRs of 6%, but savings account A compounds interest semiannually, while savings account B compounds interest quarterly. Which savings account offers the higher APY?

A. Savings account B, because it has more compounding periods per year

B. Savings account A, because it has more compounding periods per year

C. Savings account A, because it has fewer compounding periods per year

D. Savings account B, because it has fewer compounding periods per year

Answer 1

Savings account B, because it has more compounding periods per year

Answer 2

The savings account B will offer a higher amount of APY even though both accounts offer 6% compound interest, because it has more compounding periods per year.

What is the significance of compound interest?

The amount of interest, which is earned over the interest accumulated during the previous period along with the principal amount of deposit, is known as the compound interest.

The savings account B is compounded quarterly, so it has four compounding periods per year, whereas it is twice a year for savings account A. As per the thumb rule and rational logic, more interest will be accumulated if the periods of compounding are more.

Hence, option A holds true regarding the significance of the compound interest.

Learn more about compound interest here:

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