Term 3 · Week 1 · Compound Interest

Basic problem

Basic

Two accounts both advertise 6% per year. Account X compounds annually; Account Y compounds monthly. After one year, which is true?

Show step-by-step solution

Answer: b. Y earns more

Monthly compounding adds interest on interest within the year: $(1+0.06/12)^{12} \approx 1.0617 > 1.06$ .
The effective rate of Y is about 6.17%, so Y earns more for any deposit.

Common errors to watch for

gm11.t3.w1.c1
Solve problems involving compound interest, including maturity value, future value, nominal rates, and number of terms.