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

question 48

Multiple Choice

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?

• A) 3.5% compounded daily
• B) 3.25% compounded monthly
• C) 3.4% compounded quarterly
• D) 3.75% compounded annually

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Definitions:

Non-interest-bearing Notes

Debt instruments that do not accrue interest over time, thus repaid at their face value.

Incremental Borrowing Rate

The interest rate a lessee would have to pay to borrow over a similar term the funds necessary to purchase or lease an asset.

Non-interest-bearing Note

A promissory note in which no interest is earned or paid over the life of the note, with the borrower repaying only the face value of the note.