How Compound Interest Builds
Written by Studio AM.
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Compound interest means earning interest on both the money you save and the interest already added. Suppose you save $100 at a fixed annual rate of 5%, with interest added once a year. After the first year, you have $105. In the second year, interest is calculated on that $105, bringing the total to $110.25.
Each round builds on the last. If the rate stays positive and the money remains saved, the amount earned each year grows too. Over enough time, a graph of the balance can rise more steeply. Starting earlier gives this process more time. However, the final amount also depends on the rate, fees, and how much you add or withdraw. Time matters, but it is not the only factor.
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Question 1 of 4
What is the main idea of the passage?
The answer is B: Compound interest earns gains on earlier gains over time.
The passage explains that interest is earned on both original savings and prior interest, and that time is the key advantage.
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Question 2 of 4
If two savers use the same positive rate, why can an earlier start help?
The answer is B: It gives earlier interest more time to earn further interest.
An earlier start allows more rounds of interest on prior interest, assuming the other conditions are the same.
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Question 3 of 4
In the passage, 'steeply' most nearly means
The answer is B: sharply and quickly upward
A graph rising more steeply gains height faster as time passes.
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Question 4 of 4
According to the passage, what do you earn money on in the second year?
The answer is C: Both your original savings and the first year's interest
In the second year, you earn on both the original savings and the first year's interest. Each round builds on the last.
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