Multiple Choice
Which of the following formulas represents the present value (PV) of a single future sum (FV) discounted at an interest rate \(r\) for \(n\) periods?
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10. Time Value of Money
Time Value of Money Equations
Multiple Choice
Which of the following best describes the difference between simple interest and compound interest?
A
Simple interest is calculated only on the original principal, while compound interest is calculated on the principal plus any previously earned interest.
B
Simple interest and compound interest are both calculated only on the original principal.
C
Simple interest is calculated on the principal and all future interest, while compound interest is calculated only on the original principal.
D
Compound interest is always less than simple interest for the same time period and rate.
Verified step by step guidance1
Step 1: Understand the concept of simple interest. Simple interest is calculated only on the original principal amount, meaning the interest does not compound or accumulate over time.
Step 2: Understand the concept of compound interest. Compound interest is calculated on the principal amount plus any previously earned interest, meaning the interest accumulates and grows over time.
Step 3: Compare the two concepts. Simple interest remains constant over time because it is based solely on the original principal, while compound interest grows because it includes interest earned in previous periods.
Step 4: Analyze the options provided in the problem. Identify which option correctly describes the difference between simple and compound interest based on the definitions and characteristics explained.
Step 5: Eliminate incorrect options by checking if they align with the definitions of simple and compound interest. Select the option that accurately reflects the difference between the two types of interest.
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