Question

1.
How is the interest calculated on the following account?
Year Interest Total
1 $20 $520
2 $20.80 $540.80
3 $21.63 $562.463


A.
The Rule of 72

B.
Monthly compounded interest

C.
Compound interest

D.
Simple interest

Answer 1

C. Compound interest

Explanation: The interest each year is calculated on the new total (year 2 interest = 4% of $520 = $20.80; year 3 interest = 4% of $540.80 ≈ $21.63), so interest is being compounded annually.