*Compound interest formula
 
 

*Plug in appropriate values
 

*Calculate inside (   )
 
 

Taking the difference between the compound amount and the principle we get 2100 - 2100 = 100. 

Therefore, the compound interest is $100.

(return to problem 1a)

*Compound interest formula
 
 

*Plug in appropriate values
 

*Calculate inside (   )
*Raise (  ) to the 6th power
 
 

(return to problem 2a)

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:

*Effective rate formula
 

*Plug in appropriate values
 

*Calculate inside (   )
*Raise (  ) to the 365th power
 
 
 

Next let’s change the 6 1/8% compounded quarterly to an effective rate:

*Effective rate formula

*Plug in appropriate values
 

*Calculate inside (   )
*Raise (  ) to the 4th power
 
 
 
 

Now we only have one variable - the rate.  Since they are both converted to an effective rate (compounded annually).  Comparing the two, it looks like 6 1/8% compounded quarterly would give a better return.  What do you think? 

(return to problem 3a)