Question

Craig can buy a three-year compound-interest GIC paying 4.6% compounded semiannually or 4.5% compounded monthly. Which option should he choose? Present calculations that support your answer. View Solution:

Answer 1

Assume principal amount to be $10000.

Semi annual compounding

Semi annual rate ---> 4.6%/2 = 2.3% semi annual rate

No. of compunding periods = 3*2 = 6

Amount = Principal x (1+semi annual rate)^6

Amount = 10000 x (1+2.3%)^6

Amount = 11,461.83

Monthly compounding

Monthly rate ---> 4.6%/12 = 0.38% monthly rate

No. of compunding periods = 12*3 = 36

Amount = Principal x (1+monthly rate)^36

Amount = 10000 x (1+0.38%)^36

Amount = 11,442.48

	Semi-annual compounding	Monthly compounding
Amount	11,461.83	11,442.48
Principal	10,000.00	10,000.00
Interest (Amount - Principal)	1,461.83	1,442.48

Semi annual compounding @ 4.6% earns higher interest in comparision to monthly compounding @ 4.5%.