Compounding refers to
A)the calculation of interest rates after the compounding effect of taxes has been allowed for.
B)the paying back of both interest and principal during the life of a fixed payment loan.
C)the process of earning interest on both the interest and the principal of an investment.
D)the increased value of an investment that arises from the payment of periodic interest.

Question

Quizplus · Accepted Answer

Compounding refers to the process of earning interest not only on the principal amount invested but also on any interest accumulated over time. This can lead to exponential growth in the value of an investment. A is incorrect as taxes are not directly related to compounding, B is incorrect as paying back both interest and principal is a characteristic of amortizing loans, and D is incorrect as periodic interest payments do not necessarily lead to compounding.

Compounding Refers to