Multiple Choice
Which term describes the process of paying off a debt with a fixed payment plan over a specific period of time?
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10. Time Value of Money
Time Value of Money Equations
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Which term best describes the process where interest is earned on both the initial principal and on interest previously earned?
A
Simple interest
B
Compound interest
C
Discounting
D
Amortization
Verified step by step guidance1
Understand the key terms: Simple interest refers to earning interest only on the initial principal, while compound interest involves earning interest on both the initial principal and previously earned interest.
Identify the process described in the question: The question specifies earning interest on both the initial principal and previously earned interest.
Match the description to the correct term: The process of earning interest on both the initial principal and previously earned interest is known as compound interest.
Eliminate incorrect options: Simple interest does not involve earning interest on previously earned interest. Discounting refers to determining the present value of future cash flows, and amortization involves spreading out a cost or loan repayment over time.
Conclude that the correct term for the described process is compound interest.
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