Answer:
Option 2: monthly compounding
Step-by-step explanation:
You want to know whether compounding 1 time per year or 12 times per year earns more interest.
Compound interest
The compound interest multiplier for compounding n times per year is ...
(1 +r/n)^n
When 4% interest is compounded 1 time per year, the effective multiplier is ...
(1 +0.04/1)^1 = 1.04
When 4% interest is compounded monthly (12 times per year), the effective multiplier is ...
(1 +0.04/12)^12 ≈ 1.04074154
Compounding 12 times per year earns more interest.
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Additional comment
On the investment of $5000, the monthly compounding will earn about $3.71 more in interest for the year.
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