Mathematics for FinancePYQ Jan 21Question 1217 of 512
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Which is a better investment 9%\displaystyle 9\% p.a. compounded quarterly or 9.1%\displaystyle 9.1\% p.a. simple interest?

Options

A9%\displaystyle 9\% compounded
B9.1%\displaystyle 9.1\% S.T.
CBoth are same
DCannot be said
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Correct Answer

✅ Option a — 9%\displaystyle 9\% compounded

All Options:

  • A9%\displaystyle 9\% compounded
  • B9.1%\displaystyle 9.1\% S.T.
  • CBoth are same
  • DCannot be said

Detailed Solution & Explanation

**Comparison of Investments** To compare the two investments, we calculate their effective annual rates. **Investment 1: 9%\displaystyle 9\% p.a. compounded quarterly** - Nominal rate (r\displaystyle r) = 9%=0.09\displaystyle 9\% = 0.09 - Quarterly rate i=r4=0.094=0.0225\displaystyle i = \frac{r}{4} = \frac{0.09}{4} = 0.0225 per quarter. - Effective annual rate (E1\displaystyle E_1) is: E1=(1+i)4−1E_1 = (1 + i)^4 - 1 E1=(1.0225)4−1E_1 = (1.0225)^4 - 1 E1≈1.093083−1=9.3083%≈9.31%E_1 \approx 1.093083 - 1 = 9.3083\% \approx 9.31\% **Investment 2: 9.1%\displaystyle 9.1\% p.a. simple interest** - Effective annual rate (E2\displaystyle E_2) is simply the simple interest rate per year: E2=9.1%E_2 = 9.1\% **Conclusion:** Comparing the two rates, we see that E1=9.31%>E2=9.1%\displaystyle E_1 = 9.31\% > E_2 = 9.1\%. Therefore, the 9%\displaystyle 9\% compounded quarterly investment is a better investment. Hence, **Option A** is the correct answer.

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