Asked by Valeriya Pestrikova on Jun 02, 2024

verifed

Verified

Consider a graph of future values of two investments of $1000. How would you expect the graphs of the future values to look if both investments earn 5% nominal rate, but investment 1 is compounded monthly and investment 2 is compounded semi-annually?

A) Investment 1 is steeper and the graph is growing at a faster rate.
B) Investment 2 is steeper and the graph is growing at a faster rate.
C) Investment 1 is steeper and the graph is growing at a slower rate.
D) Investment 2 is steeper and the graph is growing at a slower rate.
E) The two graphs look the same as they are both compounding interest.

Nominal Rate

The promoted or declared rate of interest on a loan or investment, excluding the impacts of compounding and inflation.

Compounded Monthly

Interest calculation method involving the addition of interest to the principal sum of a loan or deposit, repeated every month.

Compounded Semi-Annually

Interest calculation method where interest is added to the principal sum twice a year, leading to interest earnings on interest.

  • Evaluate the expansion of investments through various rates and periods of compounding.
verifed

Verified Answer

SS
Shiri ShaheidJun 07, 2024
Final Answer :
A
Explanation :
The graph of Investment 1, which is compounded monthly, will grow at a faster rate than Investment 2, which is compounded semi-annually, due to the effects of more frequent compounding periods within a year.