GRE General TestQuantitative ReasoningHard
A financial analyst is evaluating two investment options. Option A offers a 4% annual return compounded quarterly. Option B offers a 4.2% annual return compounded annually. If a principal of $10,000 is invested for 5 years, which option yields a higher return, and by approximately how much?
- AOption B by $88.36
- BOption B by $44.18
- COption A by $44.18
- DOption A by $88.36
Show answer & explanationAnswer & explanation
Correct answer: B. Option B by $44.18
Calculate the future value for each option using the compound interest formula A = P(1 + r/n)^(nt) and then compare the results.
Why the other options are wrong
- A. Incorrect option identified and incorrect difference.
- C. Incorrect option identified and incorrect difference.
- D. Incorrect option identified and incorrect difference.
Compound Interest Comparison
Comparing different compound interest scenarios involves calculating the future value for each option based on principal, interest rate, compounding frequency, and time.
- Compound interest formula: A = P(1 + r/n)^(nt).
- Higher compounding frequency (n) generally leads to higher returns for the same annual rate.
- Small differences in rates or compounding can lead to significant differences over time.
Memory trick: Compound Compare: Calculate each one's 'A'mount with P(1+r/n)^(nt), then 'C'ompare!