ECONOMICS
COMPOUND INTEREST
|
Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
|
|
|
interest increases by fixed amount
|
|
|
compound interest
|
|
|
compound continuously
|
|
|
decreases by fixed percent
|
Detailed explanation-1: -We use P*e^(r*t) ONLY when we are compounding infinite times (n=infinite).
Detailed explanation-2: -The equation for “continual” growth (or decay) is A = Pert, where “A", is the ending amount, “P” is the beginning amount (principal, in the case of money), “r” is the growth or decay rate (expressed as a decimal), and “t” is the time (in whatever unit was used on the growth/decay rate).
Detailed explanation-3: -Calculating the limit of this formula as n approaches infinity (per the definition of continuous compounding) results in the formula for continuously compounded interest: FV = PV x e (i x t), where e is the mathematical constant approximated as 2.7183.
Detailed explanation-4: -Program Evaluation Review Technique (PERT) is a project management planning tool used to calculate the amount of time it will take to realistically finish a project. PERT charts are used to plan tasks within a project-making it easier to schedule and coordinate team members.
Detailed explanation-5: -Why Is Continuous Compounding Used? Continuous compounding is used to show how much a balance can earn when interest is constantly accruing. This allows investors to calculate how much they expect to receive from an investment earning a continuously compounding rate of interest.