Question

Advance Algebra Logarithm Task

Assume your friend, Natalie, has $10,000 to invest. Complete the following chart to show how
much she would earn if her money was invested in each of the specified accounts for 10 years.
Frequency of Annual interest Formula with values Amount after 10
compounding
substituted in
years
Quarterly 3.65%
Monthly
3.65%
Continuously
3.6%
rate
Which account would you suggest for Natalie? Continuously

Answer 1

9514 1404 393

Answer:

3.65% monthly

Explanation:

The same amount is invested for the same period in all accounts, so we only need to determine the effective annual rate in order to compare the accounts.

For compounding annual rate r n times per year, the effective annual rate is ...

(1 +r/n)^n -1

For the same rate r, larger values of n cause effective rate to be higher. As a consequence, we know that 3.65% compounded quarterly will not have as great a yield as 3.65% compounded monthly. The effective rate for the monthly compounding is ...

(1 +0.0365/12)^12 -1 = 3.712%

The effective rate for continuous compounding is ...

e^r -1

For a continuously compounded rate of 3.6%, the effective annual rate is ...

e^0.036 -1 = 3.666%

This tells us the best yield is in the account bearing 3.65% compounded monthly.

_____

If i is the effective annual rate of interest as computed by the methods above, then the 10-year account balance will be ...

10000×(1 +i)^10

This is the formula used in the spreadsheet to calculate the balances shown.