Steve invested $100 two years ago at 10 percent interest.The first year,he earned $10 interest on his $100 investment.He reinvested the $10.The second year,he earned $11 interest on his $110 investment.The extra $1 he earned in interest the second year is referred to as:

Question

Quizplus · Accepted Answer

The extra $1 earned in the second year is interest on the interest earned in the first year, which is referred to as compounding or "interest on interest". Therefore, the best choice is option D, "interest on interest".

Steve Invested $100 Two Years Ago at 10 Percent Interest