For someone who has $100,000 to save for 20 years, would a 4% Certificate of Deposit that compounds annually be a better deal than a 3.94% Certificate of Deposit that compounds quarterly? Why?

What will be an ideal response?

Answer: With the 4% annual compounding, your $100,000 would compound into $219,112.31. There would be 20 compounding periods at 4% per year and the interest would be calculated at the end of every year. Your $4,000 in interest from year one would not earn any interest until the end of year two ($160). With the quarterly compounding your interest would start earning interest itself starting with the second quarter of year one. There would be a total of 80 compounding periods (4 quarters per year times 20 years) and this would mean that even with the lower interest rate, your money would grow to $219,053.19 for a slight difference of $59.12!