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Questions and Answers
What distinguishes compound interest from simple interest?
What distinguishes compound interest from simple interest?
- Compound interest earns interest on both the principal and accumulated interest. (correct)
- Simple interest allows interest on previously accrued interest.
- Both types of interest result in the same total amount over time.
- Only the principal amount earns interest in compound interest.
In the formula for compound interest, what does the variable 'n' represent?
In the formula for compound interest, what does the variable 'n' represent?
- The initial investment amount
- The interest rate in decimal form
- The number of years the money is invested or borrowed (correct)
- The total amount accumulated after interest
Which of the following statements about compound interest is true?
Which of the following statements about compound interest is true?
- Using compound interest will always result in lower amounts owed on loans.
- With compound interest, the principal does not grow over time.
- The effect of compound interest is exponential growth in investments. (correct)
- Compound interest is generally less favorable for investments than simple interest.
Which of the following scenarios best illustrates the disadvantage of compound interest?
Which of the following scenarios best illustrates the disadvantage of compound interest?
If a principal amount of $1000 is invested at an interest rate of 5% compounded annually for 3 years, what is the accumulated amount?
If a principal amount of $1000 is invested at an interest rate of 5% compounded annually for 3 years, what is the accumulated amount?
What is the main advantage of using compound interest for investments?
What is the main advantage of using compound interest for investments?
If $500 is invested at an interest rate of 4% compounded annually for 5 years, which component of the compound interest formula does '4%' represent?
If $500 is invested at an interest rate of 4% compounded annually for 5 years, which component of the compound interest formula does '4%' represent?
Which aspect of compound interest contributes to exponential growth in investments?
Which aspect of compound interest contributes to exponential growth in investments?
When might compound interest lead to negative consequences?
When might compound interest lead to negative consequences?
In the compound interest formula, what does the term 'A' represent?
In the compound interest formula, what does the term 'A' represent?
What is one key reason why the growth of an investment using compound interest is faster than using simple interest?
What is one key reason why the growth of an investment using compound interest is faster than using simple interest?
In the context of loans, what outcome does compounding interest tend to produce over time?
In the context of loans, what outcome does compounding interest tend to produce over time?
Given the formula $A = P(1 + i)^n$, what does the term $(1 + i)$ specifically represent in this context?
Given the formula $A = P(1 + i)^n$, what does the term $(1 + i)$ specifically represent in this context?
How does the number of compounding periods affect the total accumulated amount in the compound interest formula?
How does the number of compounding periods affect the total accumulated amount in the compound interest formula?
What is a likely consequence of applying compound interest to savings over a long duration?
What is a likely consequence of applying compound interest to savings over a long duration?
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