You decide to invest $7000 and have a choice between two accounts.The first pays 6% per year,compounded quarterly (four times).The second pays 5.95% per year,co

Question

You decide to invest $7000 and have a choice between two accounts.The first pays 6% per year,compounded quarterly (four times).The second pays 5.95% per year,compounded continuously.How much would be in each account after 5 years,and which is the better investment?
first account______ second account_____ better investement____________.

Answer 1

Wemimobs,

 

For the first question, you will use the formula

 

A = P(1 + r/n)^nt,

 

where

 

P = 7000 (the principal),

r = .06 (the annual interest rate),

n = 4 (the number of compounding periods per year),

t = 5 (the length of time the money is invested).

 

Plug these into the formula, and you will get

 

A = $9427.99.

 

For the second question, you must use the formula

 

A = Pe^rt,

 

where

 

P = 7000,

r = .06,

t = 5.

 

Plug these in and get the amount after 5 years:

 

A = $9449.01.

 

It looks like the investment which is compounded continuously is the better one (slightly).