The accumulation of money in a bank account, where the interest earned remains in the account to earn additional interest?

• A. Overdraft Protection
• B. Estate Tax
• C. Collective Bargaining
• D. Compounding

Answer: (D)

Compounding is when the interest earned on a deposit stays in the account and earns its own interest. Each period, the interest becomes part of the principal, so future interest is calculated on a larger amount. This makes growth accelerate over time. For example, $100 at 5% compounded annually becomes $105 after one year, then $110.25 after two years, and so on. This is different from simple interest, where interest is earned only on the initial principal and doesn’t boost future interest. The other terms listed—overdraft protection, estate tax, and collective bargaining—describe completely different concepts, so they don’t fit this situation.