Chapter C, Problem 1SSQ

To determine

State the option that explains the difference between the simple interest and compound interest.

Answer to Problem 1SSQ

b. Simple interest includes interest earned on the initial investment only.

Explanation of Solution

Time value of money:

Time value of money refers to the concept that the value of money available at present worth more in the future due to its potential earning capacity.

Justification for the incorrect answer

Option a:

Compound interest is the interest earned on the principal amount, plus the interest accumulated for the compounding years. Therefore, Option a is an incorrect answer.

Option c:

Simple interest refers to the interest that is earned on the initial investment only and these are calculated quarterly, semiannually and annually. It is not necessary for a simple interest to be calculated for a shorter time interval. Therefore, Option c is an incorrect answer.

Option d:

Simple interest refers to the interest that is earned on the initial investment only and these are calculated quarterly, semiannually and annually. It is not necessary for a simple interest to be calculated for a longer time interval. Therefore, Option d is an incorrect answer.

Justification for the correct answer

Option b:

Simple interest refers to the interest that is earned on the initial investment only.

Therefore, from the above explanation it is observed that Option b. (Simple interest includes interest earned on the initial investment only) is the correct answer and other options a, c and d are incorrect answer.