Question

Mr. Simpson deposits his money in a savings account at the Springfield Bank. Would he earn more money with simple interest or with compound interest
A) Simple interest earns more because simple interest always has a higher rate.
B) He would earn the same amount, as these are different terms for the same thing.
C) Simple interest earns more because the interest is determined annually on the original amount.
D) Compound interest earns more because the amount on which interest is paid increases over time.

Answer 1

Correct answer choice is :

D) Compound interest earns more because the amount on which interest is paid increases over time.

Explanation:

Simple interest is the quantity of interest obtained on the initial amount of money spent. Simple interest is paid out as it is gained and does not become part of an account's interest-bearing balance. The invested amount is called the principal. Compound interest is computed on the principal amount and also on the accrued interest of prior periods, and can, therefore, be considered as interest on interest.

Answer 2

The answer is D. In the calculation of compound interest, the intrest earn in the first year is added to the initial deposit and a new higher amount results. In the second year, the interest will be calculated based on the new amount. This leads to higher interest rates.