- CFA Exams
- CFA Exam: Level I 2021
- Study Session 2. Quantitative Methods (1)
- Reading 6. The Time Value of Money
- Subject 1. The Time Value of Money and Interest Rates

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**CFA Practice Question**

Which of the following statements is true?

B. Simple interest annualizes rates while compound interest allows interest to be stated in any time period.

C. Simple interest pays interest only on principal whereas compound interest also pays interest on interest.

D. Simple interest relates to present value whereas compound interest relates to future value.

E. Simple interest relates to future value whereas compound interest relates to present value.

A. Simple interest applies when an investor receives payment while compound interest applies when an investor makes payments.

B. Simple interest annualizes rates while compound interest allows interest to be stated in any time period.

C. Simple interest pays interest only on principal whereas compound interest also pays interest on interest.

D. Simple interest relates to present value whereas compound interest relates to future value.

E. Simple interest relates to future value whereas compound interest relates to present value.

Correct Answer: C

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**User Contributed Comments**
6

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

Haiqing |
"interest on interest " is the KEY |

chinmayp |
The very defination of compound gives away the answer. |

kuzzie |
simple interest is the interest on a particular sum(principal). compund interest is the interest computed on the principal plus the added interst for the period under consideration |

gobinda |
compound is important in this question |

studyprep |
Even if you have the same principal and the same interest rate, compound the interest rate would mean having more net than the simple interest rate would have. Why? see the answer C. |

Stacerz02 |
What type of instruments use simple interest only? I've only known compound interest personally. |