Compound interest allows for the reinvestment of interest payments, which means that the interest earned is added to the principal, and future interest is calculated based on the new, higher balance. This results in a higher total value than simple interest, which only calculates interest based on the original principal amount.

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Compound Interest

Question 16

Multiple Choice

Compound interest:

A) allows for the reinvestment of interest payments.
B) does not allow for the reinvestment of interest payments.
C) is the same as simple interest.
D) provides a value that is more than simple interest.
E) is equivalent to annual interest.

Correct Answer: