CS Executive · Corporate Accounting and Financial Management · Time Value of Money
Which statement correctly distinguishes compound interest from simple interest when the rate and time period are the same and the period exceeds one compounding period?
Compound interest is calculated on the principal plus interest accumulated in earlier periods, which makes it higher than simple interest over more than one period. Simple interest is always computed on the original principal only.
- ACompound interest is calculated only on the original principal
- BCompound interest is calculated on principal plus accumulated interest, so it is higherCorrect
- CSimple interest is higher because it is calculated every period
- DBoth give identical amounts for any period
Explanation
Compound interest adds earned interest to principal at each compounding period, so later interest is charged on a larger base. Hence it exceeds simple interest for more than one period. Option A describes simple interest, so it is wrong.
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