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Questions and Answers
What does compound interest refer to?
What does compound interest refer to?
- Interest calculated on the initial principal and subtracted from the accumulated interest
- Interest calculated only on the initial principal
- Interest calculated on the initial principal and the total amount after interest
- Interest calculated on the initial principal and also on the accumulated interest from previous periods (correct)
How does compound interest differ from simple interest?
How does compound interest differ from simple interest?
- Simple interest is used for shorter time periods, while compound interest is used for longer time periods
- Simple interest is calculated on the total amount, while compound interest is calculated only on the initial principal
- Compound interest includes interest on interest, while simple interest does not (correct)
- Compound interest is calculated daily, while simple interest is calculated annually
What effect does increasing the compounding frequency have on compound interest?
What effect does increasing the compounding frequency have on compound interest?
- Higher compounding frequency leads to a decrease in the initial principal
- Compounding frequency has no effect on compound interest
- Higher compounding frequency leads to higher effective interest rates (correct)
- Higher compounding frequency reduces the total interest earned
