Tom invested $100 two years ago at 10 percent interest. The first year, he earned $10...
Tom 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:
|
A. |
interest. |
|
B. |
bonus interest. |
|
C. |
simple interest. |
|
D. |
interest on interest. |
|
E. |
future value interest. |
Homework Answers
The interest which is earned when the interest payments are reinvested is known as interest on interest. It is also referred to as compound interest. If the interest of $10 is reinvested along with the principal at a 10% rate, then the interest of the second year is $11. So, the extra $1 is interest on interest.
So, the correct answer is D.
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