You double your money in five years. The reason your return is not 20 percent per year is because:
A) it is probably a "fad" investment.
B) it does not reflect the effect of discounting.
C) it does not reflect the effect of the Rule of 72.
D) it does not reflect the effect of compounding.

Question

Quizplus · Accepted Answer

Doubling your money in five years does not equate to a 20 percent return per year due to the effect of compounding. Compounding interest means that the interest earned each year is added to the principal, so the amount of interest earned each subsequent year is based on the principal plus the previously earned interest. This process results in a rate of return that is effectively less than a simple 20 percent per year when you double your money over five years.

You Double Your Money in Five Years