How does compound interest differ from simple interest?A.Compound interest is available only to businesses and not to individual consumers.B.Compound interest must be paid each month rather than all at once.C.Compound interest is charged to somebody who borrows money using a credit card.D.Compound interest is charged on both previous interest and the original money owed.
Question
How does compound interest differ from simple interest?A.Compound interest is available only to businesses and not to individual consumers.B.Compound interest must be paid each month rather than all at once.C.Compound interest is charged to somebody who borrows money using a credit card.D.Compound interest is charged on both previous interest and the original money owed.
Solution
The main difference between compound interest and simple interest lies in the way they are calculated and accrued over time.
-
Simple Interest: This is calculated only on the initial amount (principal) that you invested or loaned. The formula for simple interest is I=Prt, where 'I' is the interest, 'P' is the principal, 'r' is the rate of interest, and 't' is the time period. This means that if you loan or invest a certain amount of money, the interest will be calculated on that initial amount only, regardless of the length of time.
-
Compound Interest: This is calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan. The formula for compound interest is A=P(1+r/n)^(nt), where 'A' is the amount of money accumulated after n years, including interest, 'P' is the principal amount, 'r' is the annual interest rate (decimal), 'n' is the number of times that interest is compounded per year, and 't' is the time the money is invested or borrowed for, in years. This means that the interest is added to the principal, and the next interest calculation is based on that combined amount, leading to a larger interest amount over time.
So, the correct answer to your question is D. Compound interest is charged on both previous interest and the original money owed.
Similar Questions
How is compound interest different from simple interest?A.Compound interest accrues daily, monthly, or quarterly rather than annually.B.Compound interest accrues only on the initial amount borrowed.C.Compound interest accrues on the interest, as well as the principal.D.Compound interest accrues on the down payment as well as the principal.SUBMITarrow_backPREVIOUS
Which describes the difference between simple interest and compound interest?Group of answer choicesSimple interest is always a whole number. Compound interest has a decimal portion.Simple interest is calculated every period. Compound interest is calculated one time.A graph of simple interest will curve upward. A graph of compound interest will be a straight line.Simple interest is calculated on the original amount. Compound interest is calculated on the total of the original amount and any money earned in interest.
Why does compound interest earn a bigger return than simple interest?A.Simple interest is subtracted from compound interest.B.Compound interest earns interest on the original deposit plus any interest already earned.C.Compound interest is at a higher interest rate than simple interest.D.Simple interest is more basic than compound interest.
Which of the following is a definition of compound interest?Group of answer choicesA percentage of money deposited divided by the time it remains deposited.Money earned after the first balance has been figured.Interest earned both on money you deposit and on money you have earned in interest.Interest earned only on money you deposit.
Which of the following statements best defines compound interest?Group of answer choicesInterest that grows with a variable rate of change that is earned only if you deposit money into an account every month.Interest that grows with a constant rate of change that is calculated both on money you deposit and on money you have earned in interest.Interest that grows with a variable rate of change that is calculated both on money you deposit and on money you have earned in interest.Interest that grows with a constant rate of change that is calculated only when you are in debt.Interest that grows with a variable rate of change that is earned only on money that you deposit.
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.