How die a compound interest rate differ from a simple interest rate?
Compound interest rates pay more interest over time
Compound interest rates are calculated only once a year
Compound interest rates ideally lower than simple interest rates••
Compound interest rates apply to home mortgages only
No.
Yes, A.\
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How does a compound interest rate differ from a simple interest rate?
A.
Compound interest rates pay more interest over time.
B.
Compound interest rates are calculated only once a year.
C.
Compound interest rates are usually lower than simple interest rates.
D.
Compound interest rates apply to home mortgages only.
A. Compound interest rates pay more interest over time.
A compound interest rate differs from a simple interest rate in several ways:
1. Calculation frequency: With compound interest, the interest is calculated and added to the principal at regular intervals (such as annually, quarterly, or monthly), allowing the interest to compound over time. In contrast, simple interest is calculated based only on the initial principal amount and does not compound.
2. Earning potential: Compound interest has the potential to earn more over time because the interest is added to the principal, and subsequent interest calculations are based on the new, increased principal amount. This compounding effect can significantly boost the total interest earned compared to simple interest.
3. Calculation methodology: Compound interest is calculated using a formula that takes into account the interest rate, the compounding frequency, and the time period. Simple interest, on the other hand, is calculated by multiplying the principal amount, the interest rate, and the time period. The simplicity of the formula for simple interest makes it easier to calculate and understand.
4. Applicability: Compound interest can be applied to a wide range of financial products, including savings accounts, investments, loans, and credit cards. It is not limited to home mortgages, as mentioned in the options.
It is important to note that the statement "compound interest rates ideally lower than simple interest rates" is incorrect. In general, compound interest rates tend to be higher because of the compounding effect, which allows for the potential growth of the investment or debt over time.