When accruing interest, which of the following will have the lowest value after one year?Group of answer choicesAn investment compounded dailyAn investment compounded weeklyAn investment compounded semi-annuallyAn investment compounded monthly
Question
When accruing interest, which of the following will have the lowest value after one year?Group of answer choicesAn investment compounded dailyAn investment compounded weeklyAn investment compounded semi-annuallyAn investment compounded monthly
Solution
The investment that will have the lowest value after one year when accruing interest is the one that is compounded semi-annually.
Here's why:
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Compounding is the process of earning interest on both the initial investment and the interest that has previously been added to it. The more frequently interest is compounded, the more interest will be earned.
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An investment compounded daily will earn the most interest because interest is being added to the initial investment every day.
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An investment compounded weekly will earn less interest than one compounded daily because interest is being added less frequently.
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An investment compounded monthly will earn less interest than one compounded weekly because interest is being added even less frequently.
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An investment compounded semi-annually will earn the least interest because interest is only being added twice a year.
So, the investment compounded semi-annually will have the lowest value after one year.
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