ECONOMICS (CBSE/UGC NET)

ECONOMICS

SAVING AND INVESTING

Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
What is compound interest?
A
the interest earned on the principal of an investment
B
the interest earned on a mutual fund
C
the interest earned on a loan
D
the interest earned on both the principal and interest of an investment or savings account
Explanation: 

Detailed explanation-1: -Compound interest is the interest on a deposit calculated based on both the initial principal and the accumulated interest from previous periods. Or, more simply put, compound interest is interest you earn on interest . You can compound interest on different frequency schedules such as daily, monthly or annually.

Detailed explanation-2: -Compound interest applies the interest rate to both the principal balance and accrued interest. In other words, it charges interest on interest. With a loan, compound interest can lead to paying more interest over time. For example, a credit card may use daily compounding interest if you’re carrying a balance.

Detailed explanation-3: -Compound interest is interest calculated on an account’s principal plus any accumulated interest. If you were to deposit $1, 000 into an account with a 2% annual interest rate, you would earn $20 ($1, 000 x . 02) in interest the first year. Assuming the bank compounds interest annually, you would earn $20.40 ($1, 020 x .

Detailed explanation-4: -Interest can be calculated in two ways: simple interest or compound interest. Simple interest is calculated on the principal, or original, amount of a loan. Compound interest is calculated on the principal amount and the accumulated interest of previous periods, and thus can be regarded as “interest on interest.”

Detailed explanation-5: -The interest on a loan or deposit calculated based on the initial principal, and the collective interest from previous periods is called compound interest.

There is 1 question to complete.