In the second-year example, the friend reinvests the principal together with the:

1. Compounding requires leaving the interest in the account. 2. In the example the principal is 1,000 dollars. 3. The earned interest is 40 dollars. 4. The friend leaves both in the account, reinvesting the entire balance for another year. _Source: OpenStax Principles of Finance (CC BY 4.0), Ch 7 'Time Value of Money I: Single Payment Value'_