A certificate of deposit that pays 9.8% compounded monthly is better than a similar certificate of deposit that pays 10% compounded only once per year.

Question

Quizplus · Accepted Answer

When interest is compounded more frequently, the effective annual yield increases. In this case, the first certificate's effective annual yield is approximately 10.22%, while the second certificate's effective annual yield is exactly 10%. Therefore, the first certificate is better even though its stated interest rate is lower.

A Certificate of Deposit That Pays 9