Compound Interest and the Time-Value of Money True/False Topic: Compound interest 1. When interest is earned on interest in a savings account in a bank, this is called compound interest. Answer: True Rationale: As interest accumulates on an investment, both the original investment and the accumulated interest will earn a return in subsequent periods. Topic: Time value of money 2. A dollar received today is worth more than a dollar received two years ago. Answer: False Rationale: It is much better to receive money as soon as possible as it can be invested and will earn additional interest. Topic: Financial calculator 3. The interest rate on a financial calculator to be inputted using the I/Yr key means to enter the rate per period. Answer: True Rationale: I/Yr is the interest rate per period. Topic: Compounding 4. If an investment is made that pays 5% annual interest for a 3-year period with semiannual compounding, the number of periods is 6. Answer: True Rationale: There are 6 semiannual periods in three years: 3 years × 2 times per year = 6 periods of compounding.