Question

Assume that the variables I, N, and PV represent the interest rate, investment or deposit period, and present value of the amount deposited or invested, respectively. Which equation best represents the calculation of a future value (FV) using:
Compound interest? Simple interest?
FV= PV x (1+ I)^N FV= PV/ (1xI XN)
FV= PV+ (PV x I x N) FV= PVx I x N
FV= PV/ (1+I)^N FV= PV +(PV x I x N)

Identify whether the following statements about the simple and compound interest methods are true or false.



All other variables held constant, investments paying simple interest have to pay significantly higher interest rates to earn the same amount of interest as an account earning compound interest.
a. True
b. False

All other factors being equal, both the simple interest and the compound interest methods will not generate the amount of earned interest by the end of the first year.
a. True
b. False

After the end of the second year and all other factors remaining equal, a future value based on compound interest will exceed a future value based on simple interest.
a. True
b. False

Answer 1

Compound interest: FV = PV / (1+I)^N

Simple interest: FV = PV + (PV x I x N)

a. True

b. False

a. True

Explanation:

Compound interest

FV = PV / (1+I)^N

Simple interest

FV = PV + (PV x I x N)

All other variables held constant, investments paying simple interest have to pay significantly higher interest rates to earn the same amount of interest as an account earning compound interest.

a. True

All other factors being equal, both the simple interest and the compound interest methods will not generate the amount of earned interest by the end of the first year.

b. False

After the end of the second year and all other factors remaining equal, a future value based on compound interest will exceed a future value based on simple interest.

a. True