Compound Interest means...

• A. Interest paid on both the principal and accumulated unpaid interest.
• B. Interest paid only on the original principal.
• C. Interest that compounds in a savings account only.
• D. Interest charged by credit cards.

Answer: (A)

Compound interest is the process of earning interest on both the original principal and any interest that has already been added to the balance. Because the interest itself grows each period, the total amount increases faster than if you were earning interest only on the initial amount. This idea is captured by describing interest as being paid on both the principal and accumulated interest. If it were only on the original principal, that would be simple interest. Limiting the concept to a savings account describes a location rather than the mechanism, and while credit cards can have interest that compounds, the term applies more broadly than just that context.