What is Compound Interest?

What is compound interest?

• Interest earned on the original investment only

• Interest plus all the interest earned over time

• A fixed interest rate for the term of the investment

• A variable interest rate depending on the market

How does compound interest differ from simple interest?

• Compound interest is calculated on the principal amount only

• Simple interest is calculated on the principal plus accumulated interest

• Compound interest includes interest on interest

• There is no difference

If you invest $10,000 at a 5% simple interest rate for 3 years, how much interest will you earn?

• $2,000

• $1,050

• $1,576.25

• $1,500

What is the interest earned in the second year with compound interest on a $10,000 investment at 5%?

• $500

• $525

• $550

• $575

How much total interest is earned over three years with compound interest on a $10,000 investment at 5%?

• $1,576.25

• $1,550

• $1,500

• $1,600

What is the difference in interest earned between using simple and compound interest over three years?

• $50

• $100

• $25

• $76.25

What is the total amount after 3 years with compound interest on a $10,000 investment at 5%?

• $11,000

• $11,576.25

• $11,500

• $12,000

How is the interest for the third year calculated with compound interest?

• A fixed amount every year

• Randomly, depending on the market

• 5% of the original $10,000

• 5% of the total amount after two years

Why does compound interest become more powerful over longer time periods?

• Because the interest rate increases

• Because you earn interest on a larger amount each year

• Because the principal amount increases

• Because the bank offers bonuses for long-term investments

What makes compound interest beneficial for investors?

• It offers a fixed return rate

• It reduces the risk of investment

• It guarantees profit regardless of market conditions

• Interest is earned on accumulated interest over time