alleryStart learning →What does compounding mean for money sitting in a deposit account?
APaying tax on the interest you earn
BEarning interest only on your deposits
CEarning interest on interest already earned
DEarning a fixed fee for each deposit made
Answer & Solution
Correct answer: C. Earning interest on interest already earned
1. Interest already credited to an account becomes part of the balance.
2. The next interest calculation runs on that larger balance, so interest earns interest.
3. That is compounding, and more frequent compounding produces more interest.
4. Earning interest only on deposits describes simple interest, not compounding.
_Source: FDIC Money Smart for Adults (September 2018), Module 5: Your Savings, section Interest and Compounding_
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