5
QuizMultiple Choice

Investing and Financial Markets — Unit test

Question 5 • Personal Finance - EL3403

Why is compound interest preferable to simple interest when investing?

Answer
A
Compound interest pays at least double the interest on the principal during each month.
B
Compound interest is paid by the week or by the month, not only once during a year.
C
Compound interest is based on the entire principal, not just a percentage of the principal.
D
Compound interest pays interest both on the principal and the interest earned in each period.

Explanation

With simple interest, interest is calculated only on the original principal. With compound interest, each period’s interest is added to the balance, and future interest is calculated on that larger amount. So the investor earns interest on both the principal and previously earned interest, which is why choice D is correct.

AI-written and checked against the verified answer.

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