Question

Tomas earned $89 in interest on his savings account last year and has decided to leave the $86 in his account this coming year so it will earn interest. This process of earning interest on prior interest earnings is called:_____________
A) discounting.
B) compounding.
C) duplicating.
D) multiplying.
E) indexing.

Answer 1

Answer: Compounding

Explanation: In simple words, compounding refers to the process under which an individual or an entity increase the value of its assets by earning the interest on both the principal and the accumulated interest.

In the given case, the $86 that Tomas is leaving in the account to earn interest is a part of the previous earned interest.

Hence from the above we can conclude that the process in the given case is compounding.