Question

The more frequently at any given rate interest is compounded the more actual interest dollars it will produce. True or False.

Answer 1

The correct answer is True.

Answer 2

The given statement is true.

Explanation:

The more frequently interest is compounded, the greater the amount of money is accumulated in that account.

If we compare an account being compounded yearly and monthly, we will find that the account that compounds monthly, will yield more money.

For example:

Lets say p = 1000

r = 5%

t = 1

n = 12

When account is compounded annually, n = 1

We get the following formula:

`A=p(1+(r)/(n))^(nt)`

`A=1000(1+(0.05)/(1))^(1)`

A = $1050

When account is compounded monthly.

`A=1000(1+(0.05)/(12))^(12)`

=>
`A=1000(1.004167)^(12)`

A = $1051.166

We can see that monthly compounded will have more interest than the yearly one.