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

The compound interest option is the better choice because it provides a higher return. With simple interest, you earn interest only on the principal amount. With compound interest, you earn interest on the principal as well as on the interest earned in previous periods. Therefore, the compound interest option provides a higher return over the three-year period.

You Are Choosing Between Investments Offered by Two Different Banks