Basics Beginner: Make Compound Interest Work for You

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1.
The longer an investment is allowed to compound interest, the higher its return will be.
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True. Although time wont affect the actual rate of return, the return itself will grow, and it will grow much larger than it would from simple interest.
2.
Which of the following are not tax-sheltered investments you can use to compound interest?
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Municipal bonds. Tax-deferred retirement plans and deferred annuities provide compounding interest, but municipal bonds pay only simple interest. However, you can get the effect of compound interest with a municipal bond fund if you reinvest the dividends.
3.
Which of the following is used in the formula for determining compounded interest?
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All of the above. Principal, rate of return, and time periods are used in the compounding formula.
4.
The Rule of 72 states that if you divide 72 by a given interest rate, you will learn how many years it will take for an investment to double. How long would it take for an investment with an interest rate of 4% to double?
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18 years. Dividing 72 by 4 gives you 18.
5.
Reinvesting your dividends helps you compound your earnings because it _______.
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Builds your investment base. The larger your investment base, the more there is to compound.