Which term describes interest that accrues on both the principal and previously unpaid interest?

• A. Credit Card Interest
• B. Annual Fee
• C. Billing Cycle
• D. Compound Interest

Answer: (D)

The main idea here is how interest can grow over time when it is earned on both the original amount and on any interest that has already been added. This is known as compound interest. With compound interest, each period’s interest is added to the balance, so the next period’s interest is calculated on a larger amount. For example, $100 at 5% interest compounded annually becomes $105 after one year, then $110.25 after the second year, and so on. The general expression A = P(1 + r)^t captures this growth, where P is the principal, r is the rate, and t is time.

Other terms don’t describe this mechanism. Credit card interest refers to the cost charged on an outstanding balance and can involve compounding, but the term itself doesn’t define the interest-on-interest process. An annual fee is a fixed charge, not a method of calculating interest. A billing cycle is merely the time span between statements, not how interest accrues.