What term describes reinvesting earned interest back into the principal to grow money over time?

• A. Simple Interest
• B. Compound Interest
• C. Deferred Interest
• D. Fixed Interest

Answer: (B)

This is about compounding—earning interest on the interest already earned. When you reinvest that earned interest back into the principal, the balance grows not just on the original amount but also on the accumulated interest from prior periods. That means each period’s interest is calculated on a larger amount, causing growth to accelerate over time. For example, with a $100 principal at 5% annual interest, you’d have $105 after the first year. If you leave it invested, the second year’s 5% applies to $105, yielding $5.25 interest instead of $5, bringing the total to $110.25. The other terms don’t describe this process: simple interest pays only on the original principal each period, deferred interest delays interest, and fixed interest refers to a constant rate rather than the reinvestment effect.