Tom earned $120 in interest on his savings account last year.Tom has decided to leave the $120 in his account so that he can earn interest on the $120 this year.This process of earning interest on prior interest earnings is called:
A)discounting.
B)compounding.
C)duplicating.
D)multiplying.
E)indexing.

Question

Quizplus · Accepted Answer

Compounding is the process of earning interest not only on the initial amount deposited but also on the interest earned in the previous periods. In this case, Tom is earning interest on the $120 he earned last year, which is an example of compounding.

Tom Earned $120 in Interest on His Savings Account Last