
Here is another way to figure the total:
On deposit at the end of year 1: $108.00
This process of the interest paid earning interest on its own is called “com-
pounding,” and the result is called “compound interest.” The $.64 earned
during the second year on the interest paid during the first year is called
“interest on interest,” and is the result of compounding. If simple interest were
used, the result would be only 116.
The $.64 doesn’t look like much. Actually, over a period of years, interest
on interest can amount to a large sum. In fact, given enough time, there is no
limit on how much it can amount to.
If you leave the deposit with the bank for ...