Question

Which is a better investment,12% compounded quarterly or 12.2% p.a. compounded continuously

Answer 1

Answer:

12 % compounded quarterly will be the better investment

Answer 2

= 0.1268

The main objective of our financial investments is to generate returns. Therefore, the optimal choice should be chosen based on the option that offers the maximum returns on the amount invested, or the one that does so.

The first choice has a monthly compound rate of 12 percent, and the second has an annual compound rate of 12.6%. Calculating interest on principal and interest is known as compounding. Therefore, interest income increases with the number of times the compounding occurs.

However, the true distinction between these two possibilities can only be discovered by figuring out the compounded rate of interest for the same time period.

So if the first option i.e. 12% compounded monthly needs to be converted to annual compounded rate.

Annual compounded rate of interest = $(1+r/n)^{n} -1$

where, r = rate of interest per period = 12%

n = number of times compounded = 12

= $(1+0.12/12)^{12} -1$

=$(1+0.01)^{12} -1$

= $(1.01)^{12} -1$

= 1.1268 -1

= 0.1268

Which means 12.68%

So the options are 12.68% compounded annually or 12.2% compounded annually. So the 12% compounded monthly is better as it has highest rate of returns.

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