Suppose that we have BD1200 to invest for five years, and we have two choices: • Interest rate of 5% (0

Case 1 - Interest rate of 5% compounded semi - annually

Final amount = P* ( 1 + ( r/n ) ) ^nt

P = principal amount

r = annual rate of interest

n = number of compoundings per year ( for semi annual , n = 2 )

t = time period of investment

Final amount = 1200*( 1 + ( 0.05/2 ) )^(2*5)

Final amount = 1200*( 1 + 0.025)¹⁰

=> Final amount = 1200*1.28

Final amount = BD 1536.10

Case 1 - Interest rate of 5% compounded continously

Final amount = P ( e^rt )

P = principal amount

r = annual rate of interest

t = time period of investment

e = Eulers number = 2.71828

=> Final amount = 1200*( e^(0.05*5) )

=> Final amount = 1200*( e^0.25 )

=> Final amount = 1200*( 1.284 )

=> Final amount = BD 1540.83

As the final amount is greater in the case of continous compounding ( since 1540.83 > 1536.10 ), we should choose the option where the interest rate of 5% (0.05) is boeing compounded continuously.