Answer
It is better to invest at a rate of 8% compounded monthly.
Work Step by Step
This is the formula we use when we find the effective annual yield $Y$:
$Y = (1+\frac{r}{n})^{n}-1$
$Y$ is the effective annual yield
$r$ is the stated interest rate
$n$ is the number of times per year the interest is compounded
We can find the effective annual yield when money is invested at a rate of 8% compounded monthly.
$Y = (1+\frac{r}{n})^{n}-1$
$Y = (1+\frac{0.08}{12})^{12}-1$
$Y = 0.0830$
The effective annual yield is 8.30%
We can find the effective annual yield when money is invested at a rate of 8.25% compounded annually.
$Y = (1+\frac{r}{n})^{n}-1$
$Y = (1+\frac{0.0825}{1})^{1}-1$
$Y = 0.0825$
The effective annual yield is 8.25%
It is better to invest at a rate of 8% compounded monthly.
