You are choosing between investments offered by two different banks. One promises a return of 10% for three years using simple interest while the other offers a return of 10% for three years using compound interest. You should:
A) Choose the simple interest option because both have the same basic interest rate.
B) Choose the compound interest option because it provides a higher return.
C) Choose the compound interest option only if the compounding is for monthly periods.
D) Choose the simple interest option only if compounding occurs more than once a year.
E) Choose the compound interest option only if you are investing less than $5,000.

Question

Quizplus · Accepted Answer

Compound interest generates interest on both the initial principal and the accumulated interest from previous periods, leading to a higher return than simple interest, which only generates interest on the principal.

You Are Choosing Between Investments Offered by Two Different Banks