Question

Investing $1,000 at a 5% annual interest rate for 6 years, compounded every two months,

yields $1,348.18. Without doing any calculations, rank these four possible changes in order
of the increase in the interest they would yield from the greatest increase to the least
increase:
• Increase the starting amount by $100.
• Increase the interest rate by 1%.
• Let the account increase for one more year.
• Compound the interest every month instead of every two months.
Once you have made your predictions, calculate the value of each option to see if your
ranking was correct.

Answer 1

Explanation:

Ranking:

Compound the interest every month instead of every two months.

Increase the interest rate by 1%.

Let the account increase for one more year.

Increase the starting amount by $100.

Calculations:

If the interest is compounded monthly instead of every two months, the final value would be $1,357.36, which is an increase of $9.18 compared to the original value.

If the interest rate is increased to 6%, the final value would be $1,411.58, which is an increase of $63.40 compared to the original value.

If the account increases for one more year at the same interest rate, the final value would be $1,435.09, which is an increase of $86.91 compared to the original value.

If the starting amount is increased by $100, the final value would be $1,421.61, which is an increase of $73.43 compared to the original value.