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The extra 1.60 earned in that second year is interest on:
AThe final year's taxes
BThe first year's interest
CThe first year's deposit
DThe final year's fees
Answer & Solution
Correct answer: B. The first year's interest
1. Only 40 of the base was new.
2. That 40 itself earned 4%.
3. It is interest on the first year's interest.
_Source: OpenStax Principles of Finance 2e, Chapter 7, Time Value of Money I._
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