Question

If principal is invested at a constant interest rate, the value of the account will increase:...

If principal is invested at a constant interest rate, the value of the account will increase:
at an increasing rate over time.
at a decreasing rate over time.
at a linear rate over time.
at a constant rate over time.
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Answer #1

If principal is invested at a constant interest rate, the value of the account will increase at an increasing rate over time. In case of compound interest, the amount by which the principal grows every year is added to the principal amount. This means that the interest earned on the principal amount each year is reinvested and we earn an interest on that too. Also in case of compound interest the money grows exponentially. The longer the period of investment, the greater is the interest earned and the more will be the value of the account. With each additional year the ratio between the interest and the original amount increases. The formula for compound interest is:

where C.I.= Compound interest, P= Principal, r= rate of interest, n number of periods
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