Compounding means that interest earned each year, plus the principal, will be reinvested at the stated rate.

Question

Quizplus · Accepted Answer

Compounding refers to the reinvestment of both the principal and interest earned at a certain rate each year. As a result, the total amount of interest accrued grows exponentially over time, as interest is earned not only on the initial principal, but also on the interest earned in previous periods.

Compounding Means That Interest Earned Each Year, Plus the Principal