When a CD is reinvested together with its accumulated interest, the ultimate yield will be higher than the stated rate of interest.

When a CD is reinvested together with its accumulated interest, the ultimate yield will be higher than the stated rate of interest.

• A. True
• B. False
• C. Sometimes
• D. Never

Answer: (A)

Reinvesting interest creates compound growth: the interest earned is added to the principal and earns interest in future periods. That extra layer of earning causes the total return to grow faster than the stated rate alone. For example, at a 5% annual rate, reinvesting the first year’s interest means your balance becomes 1,000 + 50 = 1,050 for the second year, not just 1,000. After three years, you have 1,000*(1.05)^3 ≈ 1,157.63, which is higher than the simple sum of yearly interest (1,000 + 50 + 50 + 50 = 1,150). The effect grows with more frequent compounding, so the ultimate yield exceeds the stated rate.

Reinvesting interest creates compound growth: the interest earned is added to the principal and earns interest in future periods. That extra layer of earning causes the total return to grow faster than the stated rate alone.

For example, at a 5% annual rate, reinvesting the first year’s interest means your balance becomes 1,000 + 50 = 1,050 for the second year, not just 1,000. After three years, you have 1,000*(1.05)^3 ≈ 1,157.63, which is higher than the simple sum of yearly interest (1,000 + 50 + 50 + 50 = 1,150). The effect grows with more frequent compounding, so the ultimate yield exceeds the stated rate.