Which of the following statements is correct, assuming positive interest rates and holding other things constant?
A) Banks A and B offer the same annual rate of interest, but A pays interest quarterly and B pays semiannually. A deposit in Bank B will have a higher value in five years.
B) Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays monthly. A deposit in Bank B will have a higher value in five years.
C) Banks A and B offer the same nominal annual rate of interest, but A pays interest daily and B pays semiannually. A deposit in Bank B will have a higher value in five years.
D) Banks A and B offer the same nominal annual rate of interest, but A pays interest weekly and B pays quarterly. A deposit in Bank B will have a higher value in five years.

Question

Quizplus · Accepted Answer

The more frequently interest is compounded, the higher the future value of a deposit will be, assuming the same nominal interest rate. Therefore, a deposit in Bank B, which compounds monthly, will have a higher value than a deposit in Bank A, which compounds quarterly, after five years.

Which of the Following Statements Is Correct, Assuming Positive Interest