Question

Christina invested $3,000 five years ago and earns 2 percent interest on her investment. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as which one of the following?

A. Simplifying.
B. Compounding.
C. Aggregation.
D. Accumulation.
E. Discounting.

Answer 1

B. Compounding.

Step-by-step explanation:

Compounding interest is when the interest earned is added to the principal amount at the end of a period. Adding earned interest to the principal increasing the interest earned in the second season as the interest will be calculated with a bigger principal.

Unlike in simple interest where the interest is constant, interest earned increases with time with compound interest. Compounding means adding interest to the principal, implying that the interest earned also earns interest. Compound interest-earning accounts are preferred to simple interest due to their ability to make more interests.