Question

Determine which is the better investment: 6.5% compounded daily or 6.33% compounded quarterly. Round your answers to 2 decimal places.

Answer 1

Solution:

The formula for effective rate is sown below

For 6.5% daily investement,

$\begin{gathered} r=6.5\text{ \%=0.065} \\ m=365 \\ n=365 \\ Effective\text{ rate = \lparen1+}\frac{0.065}{365})^{365}-1^ \\ =0.0671 \\ \\ =0.0671\text{ x 100 =6.71\%} \end{gathered}$

For 6.33% daily investement,

$\begin{gathered} r=6.33\text{ \%=0.0633} \\ m=4 \\ n=4 \\ Effective\text{ rate = \lparen1+}\frac{0.0633}{4})^4-1^ \\ =0.0648 \\ \\ =0.0648\text{ x 100 =6.48\%} \end{gathered}$

The 6.5% daily investment produced more effective rate compared to that of 6.33% investment,

Hence, 6.5% daily investment is a better investment