Multiple Choice
When something earns compound interest, it earns interest on:
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10. Time Value of Money
Time Value of Money Equations
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Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
Interest rates are expressed as a percentage of which of the following?
A
Taxes owed
B
Investment fees
C
The loan
D
The profit
Verified step by step guidance1
Understand the concept of interest rates: Interest rates represent the cost of borrowing money or the return on investment, expressed as a percentage of the principal amount (the loan or investment).
Identify the principal amount: In the context of loans, the principal is the original amount borrowed. For investments, it is the initial amount invested.
Clarify the relationship: Interest rates are calculated as a percentage of the principal amount, not taxes owed, investment fees, or profit. This percentage determines the amount of interest accrued over a specific period.
Recognize the application: For loans, the interest rate determines how much the borrower pays in addition to repaying the principal. For investments, it determines the return earned on the principal.
Review examples: For a loan of $1,000 with an annual interest rate of 5%, the interest for one year would be calculated as 5% of $1,000, which equals $50. This demonstrates how interest rates are tied to the loan amount.
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