Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

10. Time Value of Money

Time Value of Money Equations

Financial Accounting

10. Time Value of Money

Time Value of Money Equations

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Multiple Choice

Which term best describes interest that is calculated on both the original principal and any interest that has already been earned?

Compound interest

Discounted interest

Simple interest

Nominal interest

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Verified step by step guidance

Understand the concept of interest: Interest is the cost of borrowing money or the return on investment for lending money. It can be calculated in different ways depending on the type of interest.

Learn about simple interest: Simple interest is calculated only on the original principal amount. The formula for simple interest is \( I = P \cdot r \cdot t \), where \( P \) is the principal, \( r \) is the interest rate, and \( t \) is the time period.

Understand compound interest: Compound interest is calculated on the original principal and also on any interest that has been earned in previous periods. The formula for compound interest is \( A = P \cdot (1 + r)^t \), where \( A \) is the total amount, \( P \) is the principal, \( r \) is the interest rate, and \( t \) is the number of compounding periods.

Compare the terms: Discounted interest refers to interest that is deducted upfront from the principal amount. Nominal interest is the stated interest rate without considering compounding. Compound interest involves earning interest on both the principal and previously earned interest, which matches the description in the question.

Conclude that the correct term is compound interest, as it best describes the scenario where interest is calculated on both the original principal and any interest already earned.