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You are offered three investments. The first promises to earn 10% compounded annually, the second will earn 9.5% compounded quarterly, and the third will earn 9% compounded monthly. Which is the best investment? 10% compounded annually 9.5% compounded quarterly 9% compounded monthly

You are offered three investments. The first promises to earn 10% compounded annually, the second will earn 9.5% compounded quarterly, and the third will earn 9% compounded monthly. Which is the best investment? 10% compounded annually 9.5% compounded quarterly 9% compounded monthly

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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**Understanding Investment Options** You are presented with three investment choices. Evaluate them based on their descriptions below: 1. **10% Compounded Annually** - This investment grows at a rate of 10%, compounded once per year. 2. **9.5% Compounded Quarterly** - This option offers a 9.5% return, with the interest compounded every three months. 3. **9% Compounded Monthly** - This alternative accrues interest at a rate of 9%, compounded on a monthly basis. **Question: Which investment is the most advantageous?** To determine the best investment, consider the frequency of compounding in relation to the interest rate. Frequent compounding at a lower rate might yield returns comparable to or surpassing those of less frequent compounding at a higher rate. Consider calculating the effective annual rate (EAR) for each to make an informed decision.
Transcribed Image Text:**Understanding Investment Options** You are presented with three investment choices. Evaluate them based on their descriptions below: 1. **10% Compounded Annually** - This investment grows at a rate of 10%, compounded once per year. 2. **9.5% Compounded Quarterly** - This option offers a 9.5% return, with the interest compounded every three months. 3. **9% Compounded Monthly** - This alternative accrues interest at a rate of 9%, compounded on a monthly basis. **Question: Which investment is the most advantageous?** To determine the best investment, consider the frequency of compounding in relation to the interest rate. Frequent compounding at a lower rate might yield returns comparable to or surpassing those of less frequent compounding at a higher rate. Consider calculating the effective annual rate (EAR) for each to make an informed decision.
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