Multiple compounding periods (FV): Your mother is trying to choose one of the following bank CDs to deposit $10,000. Which one will have the highest future value if she plans to invest for three years?

Question

Quizplus · Accepted Answer

The formula for future value with multiple compounding periods is FV = P(1 + r/n)^(nt), where P is the principal, r is the annual interest rate, n is the number of times interest is compounded per year, and t is the number of years.

Using this formula, we can calculate the future value for each CD option:

A) FV = 10,000(1 + 0.035/365)^(365*3) = $11,608.45 
B) FV = 10,000(1 + 0.0325/12)^(12*3) = $11,494.87 
C) FV = 10,000(1 + 0.034/4)^(4*3) = $11,580.85 
D) FV = 10,000(1 + 0.0375/1)^(1*3) = $11,576.56

Therefore, option A, with a daily compounding frequency, will have the highest future value at the end of three years.

Multiple Compounding Periods (FV): Your Mother Is Trying to Choose