- CFA Exams
- CFA Level I Exam
- Topic 1. Quantitative Methods
- Learning Module 1. Rates and Returns
- Subject 1. Interest Rates and Time Value of Money

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**CFA Practice Question**

You are choosing between investments offered by two different banks. One promises a return of 10% for three years in simple interest while the other offers a return of 10% for three years in compound interest. You should ______.

B. choose the compound interest option because it provides a higher return than the simple interest option

C. choose the compound interest option only if the compounding is for monthly periods

D. choose the simple interest option only if compounding occurs more than once a year

E. choose the compound interest option only if you are investing less than $5,000

A. choose the simple interest option because both have the same basic interest rate

B. choose the compound interest option because it provides a higher return than the simple interest option

C. choose the compound interest option only if the compounding is for monthly periods

D. choose the simple interest option only if compounding occurs more than once a year

E. choose the compound interest option only if you are investing less than $5,000

Correct Answer: B

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**User Contributed Comments**
4

User |
Comment |
---|---|

mbowa |
The higher the compounding periods, the higher the rate of return, it applies in this case |

msk500 |
I think it because with compounding, you earn interest on interest, while as with simple interest, you only earn interest on the principal amount invested. |

lordcomas |
one time interest vs. (x) times interest over interest. |

cailucky |
1000 * 10% *3 vs 1000 * (1+10%)^3 - 1000 |