CFA Practice Question

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CFA Practice Question

Which of the following statements is true?

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

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.
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