Question

The same amount of principal is invested in different accounts earning the same interest rate. Which of the following accounts would have the greatest accumulated value at the end of one year?
a.
An account earning no interest
b.
An account earning simple interest
c.
An account earning interest compounded annually
d.
An account earning interest compounded daily


Please select the best answer from the choices provided

A
B
C
D

Answer 1

D

With a positive interest rate r, after one year:
- No interest: P
- Simple interest or annual compounding: P(1 + r)
- Daily compounding: P(1 + r/365)^{365}, which is slightly larger than P(1 + r)

So daily compounding gives the greatest accumulated value.