3 On interest rate compounding a True or False If your bank

3. On interest rate compounding: (a) True or False: If your bank compounds daily instead of annually, then your interest earned will be twice as much! You m ay assume the bank currently compounds your interest annually at 50%. (b) At what interest rate will that statement be completely precise? Le., at what interest rate will the daily compounding be exactly twice that of the annual compounding at the end of 1 year?

Solution

3.

a) It is false. Since compound interest also takes into consideration accumulated interest of previous periods, the interest amount is not same for all periods. Therefore it will not exactly double.

b) At an interest rate of 69% compounded daily will be exactly twice at the end of 1 year.