Savings account A and savings account B both offer APRs of 5%, but savings account A compounds interest annually, while savings account B compounds interest monthly. Which savings account offers the higher APY?
Accepted Solution
A:
Answer:Account B will yield more.Step-by-step explanation:Savings account A and savings account B both offer APRs of 5%But savings account A compounds interest annually, while savings account B compounds interest monthly. Lets check which account will yield more :Account A.Lets take p = 10,000r = 5% or 0.05n = 1t = 1Compound interest formula is :[tex]p(1+\frac{r}{n})^{nt}[/tex]Substituting values in formula;[tex]10000(1+\frac{0.05}{1})^{1}[/tex]= $10500Account B:Lets take p = 10,000r = 5% or 0.05n = 12t = 1Compound interest formula is :[tex]p(1+\frac{r}{n})^{nt}[/tex]Substituting values in formula;[tex]10000(1+\frac{0.05}{12})^{12}[/tex]= $10510We can see that account B gives more yield as compared to account A. When an account is compounded monthly, we earn interest on interest. This is why we yield more. Therefore, account B will yield more.