Multiple choice

Which of the following is the best investment option for the purpose of getting the maximum benefits of compounding?

  1. 12% interest paid yearly

  2. 6% interest paid every 6 months

  3. 3% interest paid every quarter

  4. 1% interest paid monthly
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

More frequent compounding yields higher returns. The effective annual rate for 1% monthly is (1.01)^12 - 1 = 12.68%, beating 12% yearly, 12.36% semi-annually, and 12.55% quarterly. Option D maximizes compounding benefits.

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