Which compounding term results in the most number of times that the interest is calculated in a year?
A. monthly
B. quarterly
C. semiannual
D. annual
Answer (2)
Monthly compounding calculates interest 12 times a year.
Quarterly compounding calculates interest 4 times a year.
Semiannual compounding calculates interest 2 times a year.
Annual compounding calculates interest 1 time a year.
Monthly compounding results in the most frequent interest calculation: m o n t h l y .
Explanation
Analyzing the Problem We need to determine which compounding term results in the most frequent interest calculation within a year. Let's analyze each option:
Monthly Compounding Monthly: Interest is calculated 12 times a year.
Quarterly Compounding Quarterly: Interest is calculated 4 times a year.
Semiannual Compounding Semiannual: Interest is calculated 2 times a year.
Annual Compounding Annual: Interest is calculated 1 time a year.
Comparing the Frequencies Comparing the number of times interest is calculated for each term, we can see that monthly compounding results in the highest frequency of interest calculation (12 times a year).
Final Answer Therefore, the compounding term that results in the most number of times that the interest is calculated in a year is monthly.
Examples
Understanding compounding frequency is crucial in finance. For instance, if you invest money in a savings account, the more frequently the interest is compounded, the faster your investment grows. Choosing a monthly compounding option over an annual one can significantly increase your returns over time, especially for long-term investments. This concept also applies to loans; understanding compounding periods helps you assess the true cost of borrowing.
The compounding term that results in the most number of times that interest is calculated in a year is monthly compounding, which occurs 12 times a year. Other options such as quarterly, semiannual, and annual compounding calculate interest less frequently. Therefore, the correct answer is monthly .
;
