Homework SourseA is used to accumulate a required amount of money by the
A __________ __________ is used to accumulate a required amount of money by the end of a certain period of time to pay off a financial obligation. a. sinking fund b. compound interest c. present value d. checking account e. none of the above
Solution
compound interest
The addition of interest to the principal sum of a loan or deposit is called compounding. Compound interest is interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously-accumulated interest. Compound interest is standard in finance and economics. Albert Einsteinsaid \"Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn\'t ... pays it.\"
Compound interest may be contrasted with simple interest, where interest is not added to the principal, so there is no compounding.
