Interest earned on both the principal and previous interest is called?

Interest earned on both the principal and previous interest is called?

• A. Compound interest
• B. Simple interest
• C. Types of investment
• D. Shares/stocks investment

Answer: (A)

Interest that is earned on the principal plus any previously earned interest is compound interest. This happens when the interest is reinvested or added to the balance, so in the next period you earn interest on both the original amount and the accumulated interest. For example, at 10% on 100, you get 110 after one year; the next year you earn 10% of 110, which is 11, bringing you to 121. This growth is faster than simple interest, where you would earn the same amount of interest each period (e.g., 10 per year on 100, totaling 120 after two years). The more frequent the compounding, the greater the total, because the interest keeps earning interest.

Interest that is earned on the principal plus any previously earned interest is compound interest. This happens when the interest is reinvested or added to the balance, so in the next period you earn interest on both the original amount and the accumulated interest. For example, at 10% on 100, you get 110 after one year; the next year you earn 10% of 110, which is 11, bringing you to 121. This growth is faster than simple interest, where you would earn the same amount of interest each period (e.g., 10 per year on 100, totaling 120 after two years). The more frequent the compounding, the greater the total, because the interest keeps earning interest.