An investment banker is responsible for investing a customers money into the greatest interest earning account. The banker has the following options for his customers investment:

Account A: interest rate=8%, term of investment=8 years, interest compounded annually.

Account B: Interest rate=7%, Term of investment=10 years, interest compounding continuously.

Which account, A or B, will earn the customer the greatest amount of interest on his $50,000 investment? In your final answer include all of your calculations.

The more often an interest rate is compounded, the better the return it provides. Continuous compounding at 4.9% would give a better return than monthly compounding at the same rate. Monthly compounding at 4.9% would give a better return than monthly compounding at 4.8%. Account B will earn the customer the greatest amount of interest.

The question is a qualitative one; no calculations are necessary. One simply needs to observe that 4.9 > 4.8.

(If the numbers were reversed, monthly compounding at 4.9% would give a better return than continuous compounding at 4.8%. A calculation is needed to come to that conclusion.)

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