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Questions and Answers
Which of the following statements about compound interest is correct?
Which of the following statements about compound interest is correct?
- Compound interest is the interest amount per period multiplied by the number of periods per year.
- Compound interest is the interest that is not added to the principal amount of the current period.
- Compound interest is the interest rate not adjusted for inflation.
- Compound interest is the addition of interest to the principal sum of a loan or deposit. (correct)
What is the difference between compound interest and simple interest?
What is the difference between compound interest and simple interest?
- Compound interest is the interest that is not added to the principal amount of the current period, while simple interest is the addition of interest to the principal sum of a loan or deposit. (correct)
- Compound interest is the interest amount per period multiplied by the number of periods per year, while simple interest is the addition of interest to the principal sum of a loan or deposit.
- Compound interest is the interest rate not adjusted for inflation, while simple interest is the interest amount per period multiplied by the number of periods per year.
- Compound interest is the addition of interest to the principal sum of a loan or deposit, while simple interest is the interest amount per period multiplied by the number of periods per year.
What is the compounding frequency in compound interest?
What is the compounding frequency in compound interest?
- The number of times per year interest is reinvested.
- The number of times per year interest is adjusted for inflation.
- The number of times per year interest is added to the principal sum. (correct)
- The number of times per year interest is paid out to the borrower.
What is the simple annual interest rate?
What is the simple annual interest rate?
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What is the result of reinvesting interest in compound interest?
What is the result of reinvesting interest in compound interest?
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Study Notes
Compound Interest vs Simple Interest
- Compound interest is the interest earned on both the principal amount and any accrued interest.
- Simple interest, on the other hand, is the interest earned only on the principal amount.
Compounding Frequency
- Compounding frequency refers to the number of times interest is calculated and added to the principal amount in a year.
Simple Annual Interest Rate
- The simple annual interest rate is the rate of interest applied to the principal amount to calculate the interest earned in a year.
Result of Reinvesting Interest
- Reinvesting interest in compound interest leads to exponential growth, as the interest earned becomes the principal amount for the next compounding period, resulting in increased interest earnings over time.
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