alleryStart learning →Reinvesting both the 1,000 dollar principal and the 40 dollars of interest means year two earns interest on:
A40 dollars only
B960 dollars only
C1,040 dollars
D1,000 dollars
Answer & Solution
Correct answer: C. 1,040 dollars
1. Compounding means the base grows each period.
2. In the second year the friend leaves the principal of 1,000 dollars in the account.
3. The earned interest of 40 dollars is also left in.
4. The entire account balance is reinvested for another year.
5. So year two earns interest on 1,040 dollars.
_Source: OpenStax Principles of Finance (CC BY 4.0), Ch 7 'Time Value of Money I: Single Payment Value'_
Keep practising Time Value of Money
Browse all Time Value of Money questions for US CMA Part 2, or explore more Finance topics.
Related questions
Complete the time value rulesTap what belongs to each directionTrue or false: time value of moneyMatch each time value termWork the rule of 72Working out today's worth of a house price six years from now is an example of:A friend with 1,000 dollars principal earning 40 dollars in year one has an interest rate Under the rule of 72, an investment growing at 6 percent a year doubles in roughly: