Question
Which of the following process best describes that the
future value of an amount is much more than the sum of the principal and the annual rate of interest?Solution
Compounding is the process in which an asset's earnings, from either capital gains or interest, are reinvested to generate additional earnings over time. An interest is added on the initial investment (principal amount), this interest is the compound interest. Since the amount would be added to the initial investment and the new interest is calculated on this amount, the investment will continue to grow as this process would be consistent all throughout the investment period.
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