PRC-2 · Chapter 5 · Question 29 of 50
If two identical lump sums are invested today for exactly one year, one at 10% simple interest and one at 10% interest compounded monthly, what will be the result at the end of the year?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) The compounded account will have a higher balance.
Explanation
Simple and compound interest only produce identical returns if compounding happens exactly once at the very end of the year. Because the compound account calculates 'interest on interest' monthly, it will yield a higher final balance.
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