Answer/Discussion
to 3a
If an investor has a choice of investing money at 6% compounded daily
or 6 1/8 % compounded quarterly, which is the better choice?
Since we don’t have the amount on this problem, and there are two variables
involved - rate and and number of compound period, we will have to find
some common ground between the two choices. We can’t assume that
the larger of the two rates is going to give us a better outcome, because
the compounding periods are different. And we can’t assume that the
more compounding periods is better because the rates are different.
So let’s change them both to effective rate - that will make the compounding
period for both be annual or once a year, and then we can compare the rates.
Let’s first change the 6% compounded daily to an effective rate: |