5 Questions
Which of the following statements about compound interest is correct?
Compound interest is the addition of interest to the principal sum of a loan or deposit.
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.
What is the compounding frequency in compound interest?
The number of times per year interest is added to the principal sum.
What is the simple annual interest rate?
The interest rate not adjusted for inflation.
What is the result of reinvesting interest in compound interest?
Interest is added to the principal sum of a loan or deposit.
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.
Test your knowledge of compound interest with this quiz! Learn about how interest is added to the principal sum of a loan or deposit, and how it can grow over time. Challenge yourself with questions about reinvesting interest and calculating compound interest.
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