Interest charges accrue on top of existing debt or savings, which leads to substantial growth over the long run. This is known as the _____ effect.
A) vesting
B) teaser
C) interest rate
D) compounding

Question

Quizplus · Accepted Answer

The effect described in the statement is compounding. Compounding occurs when interest is earned on previously earned interest, resulting in exponential growth over time. Vesting refers to the period of time before an employee has full ownership of their employer-provided retirement funds. Teaser rates are introductory rates that may be offered by credit card companies or banks to incentivize new customers. Interest rates are the percentage charged on a loan or earned on savings, but do not refer specifically to the effect of compounding.

Interest Charges Accrue on Top of Existing Debt or Savings