3 Jose Oliva is considering two investment options for a 150

3. Jose Oliva is considering two investment options for a $1,500 gift he received for graduation. Both investments have 8% annual interest rates. One offers quarterly compounding; the other compounds on a semiannual basis. Which investment should he choose? Why?

Solution

Solution: If he invests in quarterly options

Total amt he will receive after 1 year = 1,500x(1+0.02)^4 =$1623. 65

If he invests in semi-annually option

Then he will receive after 1 year = 1500x(1+ 0.04)^2 = $1622.40

Hence he should invest in quarterly option.