Your local bank offers 4-year certificates of deposit (CDs)12 % compounded quarterly. How much additional interest will you earn over 4 years on a $10,000 CD that is compounded quarterly, compared with one that is compounded annually?
A)$6,050
B)$0
C)$312
D)$220

Question

Quizplus · Accepted Answer

First, we need to calculate how much interest the CD will earn when compounded quarterly:

- Quarterly interest rate: 12% / 4 = 3%
- Number of compounding periods: 4 years x 4 quarters per year = 16 quarters
- Final balance: $10,000 x (1 + 0.03)^16 = $14,802.46

Now, we need to calculate how much interest the CD will earn when compounded annually:

- Annual interest rate: 12%
- Number of compounding periods: 4 years x 1 = 4 years
- Final balance: $10,000 x (1 + 0.12)^4 = $14,802.28

The difference between the two balances is:

$14,802.46 - $14,802.28 = $0.18

Therefore, the additional interest earned when the CD is compounded quarterly compared to annually is $0.18, which is closest to option C) $312. This answer is incorrect, so the correct answer is B) $0.

Your Local Bank Offers 4-Year Certificates of Deposit (CDs)12