Question

Tom earned $120 in interest on his savings account last year. Tom has decided to leave the $120 in his account so that he can earn interest on the $120 this year. This process of earning interest on prior interest earnings is called:A. discounting.

B. compounding.
C. duplicating.
D. multiplying.
E. indexing.

Answer 1

B. Compounding

Step-by-step explanation:

COMPOUNDING

This is the process of adding interest on interest. It can be on a loan or deposit.

It involves reinvesting an interest rather than paying it out in the expectations that that interest will yield more interest from the initial principal sum plus initially accumulated interest.

When calculating compound interest, you calculate the interest for the first period, add it to the total and then calculate interest for the next period.

Since Tom decided to put back all the interest he earned initially so as to earn more interest on the interest, he is doing compounding of interest.