You are comparing four different investments, as described below: Investment A:

Question

You are comparing four different investments, as described below:
Investment A: Pays 12%, compounded annually
Investment B: Pays 12%, compounded quarterly
Investment C: Pays 12%, compounded semi-annually
Investment D: Pays 12%, compounded continuously

Which of the above investments would result in the highest future value?

Investment A

Investment B

Investment C

Investment D

All of the investments would have the same future value since the stated interest rate is the same

Investment A

Investment B

Investment C

Investment D

All of the investments would have the same future value since the stated interest rate is the same

Explanation / Answer

Investment B would result in highest future value. Let's see how :

Assuming that the principal amount be $ 100.

Compound interest formual = P*(1+R)^n

A. If it is compounded annual = 100*(1+0.12)^1 = $ 112

B. If it is compounded quarterly = 100*(1+0.12)^4 = $ 157.35

C. If it is compounded semi-annually = 100*(1+0.12)^2 = $ 125.44

D.If it is compound continously = Pe^rt where P = Principal, e = 2.71828 r= rate of Interest and t = number of years

= 100*(2.71828)^0.12*1 = $ 112.74

Hence, we see option B has the highest future value.

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