Understanding Compound Interest

What is compound interest?

• Interest earned on a savings account

• Interest earned on the original principal plus accumulated interest

• Interest earned on a loan

• Interest earned only on the original principal

How is simple interest calculated?

• By dividing the principal by the interest rate

• By adding the interest earned to the principal

• By multiplying the principal by the interest rate and the number of periods

• By compounding the interest annually

If you deposit $10,000 at a 5% simple interest rate for three years, how much interest will you earn in total?

• $1,500

• $1,000

• $500

• $2,000

In the first year, how much interest do you earn on a $10,000 deposit at 5% interest compounded annually?

• $500

• $575

• $525

• $550

In the second year, what is the interest earned on $10,500 at 5% compounded annually?

• $500

• $525

• $550

• $575

What is the total interest earned over three years with compound interest on a $10,000 deposit at 5% annually?

• $1,500

• $1,550

• $1,576.25

• $1,525

How much more interest is earned with compound interest compared to simple interest over three years?

• $76.25

• $50

• $25

• $100

What is the interest earned in the third year on $11,025 at 5% compounded annually?

• $551.25

• $525

• $500

• $576.25

What is the principal amount after three years with compound interest on a $10,000 deposit at 5% annually?

• $12,000

• $11,025

• $11,576.25

• $10,000

Why does compound interest become more powerful over longer periods?

• Because the principal amount increases

• Because the interest rate increases

• Because the amount of earned interest becomes larger

• Because the time period decreases