Andrea deposits $500 in a bank for a fixed duration of two years. In the second year, she earns interest on the principal amount, which includes $500 and the interest earned in the first year. Here, Andrea has gained profit through which form of interest earning?

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Business

Zaniyah

16 October, 20:34

Andrea deposits $500 in a bank for a fixed duration of two years. In the second year, she earns interest on the principal amount, which includes $500 and the interest earned in the first year. Here, Andrea has gained profit through which form of interest earning?

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Juliette David · Answer 1

The type of interest Andrea has earned is compound interest.

Simply put, compound interest is given on the principal sum of the deposit, along with the interest given on it.

This means that it is an interest on interest.

In the second year, Andrea reinvested her interest rather than taking it out.

So, in the next year, she earned interest on the principal amount deposited, plus the interest she accumulated in the first year.