Art invested $100 two years ago at 8 percent interest. The first year, he earned $8 interest on his $100 investment. He reinvested the $8. The second year, he earned $8.64 interest on his $108 investment. The extra $.64 he earned in interest the second year is referred to as:
A) free interest.
B) bonus income.
C) simple interest.
D) interest on interest.
E) present value interest.

Question

Quizplus · Accepted Answer

The extra $.64 earned in the second year is referred to as "interest on interest" because it is interest earned on the reinvested interest from the previous year.

Art Invested $100 Two Years Ago at 8 Percent Interest