ECONOMICS
COMPOUND INTEREST
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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$15
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$115
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$116.05
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$1, 500
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Detailed explanation-1: -Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow? Answer: C, more than $102.
Detailed explanation-2: -Currently, money market funds pay between 0.85% and 1.05% in interest. With that, you can earn between $85 to $105 in interest on $10, 000 each year. Certificates of deposit (CDs). CDs are offered by financial institutions for set periods of time.
Detailed explanation-3: -A compound interest account pays interest on both your initial investment plus any interest previously accrued. This interest-upon-interest appreciation is the “compounding” factor that grows with time. Simple interest accounts, on the other hand, only pay interest on the original principal.
Detailed explanation-4: -k is the number of compounding periods in one year. If the compounding is done annually (once a year), k=1. If the compounding is done quarterly, k=4. If the compounding is done monthly, k=12.