Question

Identify whether the following statements about the simple and compound interest methods are true or false. Statement True False All other factors being equal, both the simple interest and the compound interest methods will accrue the same amount of earned interest by the end of the first year. After the end of the second year and all other factors remaining equal, a future value based on compound interest will never exceed the future value based on simple interest. The process of earning compound interest allows a depositor or investor to earn interest on any interest earned in prior periods.

Answer 1

Answer:

All other factors being equal, both the simple interest and the compound interest methods will accrue the same amount of earned interest by the end of the first year. true

After the end of the second year and all other factors remaining equal, a future value based on compound interest will never exceed the future value based on simple interest. false

The process of earning compound interest allows a depositor or investor to earn interest on any interest earned in prior periods. true

Explanation:

Let me illustrate with examples

I deposit $100 at a simple interest rate of 10% for a year

Simple interest = principal x rate x time

$100 x 0.1 x 1 = $10

I deposit $100 at a simple interest rate of 10% for 2 years

Simple interest = principal x rate x time

$100 x 0.1 x 2= $20

I deposit $100 at a compound interest rate of 10% for a year

Amount ( 1 + rate)^years

$100(1.1)^1 = $110

Interest = $10

I deposit $100 at a simple interest rate of 10% for 2 years

$100(1.1)^2 = $121

Interest = $21

The interest in the second year with compounding is greater than the interest with simple interest rate

Also, the interest earned in prior years is compounded