Answer:
All other factors being equal, both the simple interest and the compound interest methods will accrue the same amount of earned interest by the end of the first year. true
After the end of the second year and all other factors remaining equal, a future value based on compound interest will never exceed the future value based on simple interest. false
The process of earning compound interest allows a depositor or investor to earn interest on any interest earned in prior periods. true
Explanation:
Let me illustrate with examples
I deposit $100 at a simple interest rate of 10% for a year
Simple interest = principal x rate x time
$100 x 0.1 x 1 = $10
I deposit $100 at a simple interest rate of 10% for 2 years
Simple interest = principal x rate x time
$100 x 0.1 x 2= $20
I deposit $100 at a compound interest rate of 10% for a year
Amount ( 1 + rate)^years
$100(1.1)^1 = $110
Interest = $10
I deposit $100 at a simple interest rate of 10% for 2 years
$100(1.1)^2 = $121
Interest = $21
The interest in the second year with compounding is greater than the interest with simple interest rate
Also, the interest earned in prior years is compounded