What is compound interest?

What is compound interest?

• A. Interest calculated once per year.
• B. Interest earned on the initial deposit only.
• C. Interest earned on the principal and also on the interest that has been added to that principal.
• D. Interest that is paid out to you periodically.

Answer: (C)

Compound interest is defined as interest that is calculated on the initial principal as well as on the interest that has been added to that principal over time. This means that as interest accrues, it becomes part of the principal for the calculation of future interest. Therefore, with compound interest, the total amount of interest earned increases over time more rapidly than with simple interest, which only considers the initial amount deposited. This compounding effect means that, the more frequently interest is compounded (daily, monthly, quarterly, etc.), the more interest will accumulate, further enhancing the growth of the investment or savings. In contrast, other options reflect concepts of interest that do not account for interest on interest accrued over time.

Compound interest is defined as interest that is calculated on the initial principal as well as on the interest that has been added to that principal over time. This means that as interest accrues, it becomes part of the principal for the calculation of future interest. Therefore, with compound interest, the total amount of interest earned increases over time more rapidly than with simple interest, which only considers the initial amount deposited.

This compounding effect means that, the more frequently interest is compounded (daily, monthly, quarterly, etc.), the more interest will accumulate, further enhancing the growth of the investment or savings. In contrast, other options reflect concepts of interest that do not account for interest on interest accrued over time.