Question

Which of the following options will generate the highest interest over the term, assuming the same $100 principal?

5% quarterly compounding for 3 years

5% monthly compounding for 2 years

5%daily compounding for 2years

5% simple interest rate for 3years

Answer 1

Calculating the Future value of each of the following options to determine which generate higher Interest on Principal:-

a). 5% quarterly compounding for 3 years

where, r = Periodic Interest rate = 5%/4 = 1.25%

n= no of periods = 3 years*4 = 12

Future Value = $116.08

b). 5% monthly compounding for 2 years

where, r = Periodic Interest rate = 5%/12 = 0.41666%

n= no of periods = 2 years*12 = 24

Future Value = $110.49

c). 5%daily compounding for 2years

where, r = Periodic Interest rate = 5%/365 = 0.01369863%

n= no of periods = 2 years*365 = 730

Future Value = $110.52

d). 5% simple interest rate for 3years

Future Value = Principal Amount*(1+rt)

where, r = Periodic Interest rate = 5%

n= no of periods = 3

Future Value = $100*(1+0.05*3)

= $115

As the Future value in 5% quarterly compounding for 3 years is highest among the other options. Thus, it is a better option

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