Q1. [1]
When you invest money, you earn interest on your capital. The next year you earn interest on both your original capital and interest from the first year. In the third year, you earn interest on your capital and the interest on the first two years' interest… and so on. This concept is known as __________.
- (A) The concept of Discounting
- (B) The concept of Compounding
- (C) The concept of Simple Interest
- (D) The concept of Profit
Previously asked in CBSE board exam
2025 92 Q2 (i)
Generated by claude-sonnet-4-6 · 2026-06-15 07:06 · grounding rag
Model Answer
(B) The concept of Compounding
Earning interest on both the original capital and previously accumulated interest, year after year, is known as the concept of Compounding.
Explanation
The passage under "When to start Investing?" directly defines compounding as "accumulating the principal and the interest or dividend earned on it, year after year." Simple interest is earned only on principal; compounding earns interest on interest — that is the key distinction examiners look for here.
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