The process of determining the value to which an amount or a series of cash flows will grow in the future when interest on interest is applied is known as _____.
A)discounting
B)compounding
C)amortization
D)consolidation
E)annualizing

Question

The process of determining the value to which an amount or a series of cash flows will grow in the future when interest on interest is applied is known as _____. 
A)discounting
B)compounding
C)amortization
D)consolidation
E)annualizing

Quizplus · Accepted Answer

Compounding is the process of determining the future value of an amount or a series of cash flows by adding the interest earned over each period back to the principal amount, resulting in interest on interest. Discounting, on the other hand, is the process of determining the present value of an amount or a series of cash flows by reducing them to their equivalent in today's dollars. Amortization is the process of gradually paying off a debt by making regular payments over a period of time, while consolidation is the process of combining several financial statements or accounts into one. Annualizing refers to converting a short-term measure (such as a monthly or quarterly figure) into an annual measure for comparison purposes.

The Process of Determining the Value to Which an Amount