Multiple choice

Which of the following is a better investment? (1) Interest compounded annually at 24% (2) Interest compounded monthly at 2%

  1. 1

  2. 2

  3. Both are the same

  4. Cannot be determined
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Option 1: 24% annually. Option 2: 2% monthly compounded. Effective annual rate = (1 + 0.02)^12 - 1 = 1.02^12 - 1 approx 1.268 - 1 = 26.8%. Since 26.8% > 24%, option 2 is better.

AI explanation

Using the effective annual rate formula for compound interest, the first option yields a rate of 24% per year. For the second option, compounding monthly at 2% gives an effective annual rate of (1 + 0.02)^12 - 1, which equals approximately 0.2682 or 26.82%. Since 26.82% is greater than 24%, the second option provides a better return.

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