Question

Interest can be compounded for different time periods, such as monthly or yearly. If you were investing money, would you prefer interest compounded monthly or yearly? If you were borrowing money would you prefer interest compounded monthly or yearly?

A. Monthly for both
B. Yearly for both
C. Yearly for investing ABC monthly for borrowing
D. Monthly for investing and yearly for borrowing

Answer 1

D. monthly for investing and yearly for borrowing

Explanation:

Most people only think of interest in terms of how high or low a rate is. But understanding how interest is calculated, or compounds, is important, too. Knowing how compound interest works can help you avoid expensive mistakes and make the most of your money, whether you're depositing it, investing it, borrowing it, or spending it.

While compound interest is arguably the most important component to wealth-building, it can also be one of the best ways to wreck your finances: Having to pay compound interest can cause debt to spiral out of control.