Question

You have the choice between two investments that have the same maturity and the same nominal return. Investment X pays simple interest, Investment Y pays compounded interest. Which one should you choose?

Answer 1

Answer:

Investment Y

Explanation:

Investment Y pays compound interest, which earns interest compared to simple interest over time. In compound interest, the interest earned in the period is added to the principal, thereby increasing the principal amount for in the next period. It means that the interest earned also earns interest.

Compound interest increases the principal amount at the beginning of every period. As a result, the interest earned will be higher every year. Investment X earns simple interest. In simple interest, the principal amount remains is constant throughout the investment period. The interest in simple is constants throughout the period. Compound interest has higher returns compared to simple interest.