Andrea deposits $500 in a bank for a fixed duration of two years. In the second year, she earns interest on the principal amount, which includes $500 and the interest earned in the first year. Here, Andrea has gained profit through which form of interest earning?

The type of interest Andrea has earned is compound interest.
Simply put, compound interest is given on the principal sum of the deposit, along with the interest given on it.
This means that it is an interest on interest.
In the second year, Andrea reinvested her interest rather than taking it out.
So, in the next year, she earned interest on the principal amount deposited, plus the interest she accumulated in the first year.

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tutorconsortium33 tutorconsortium33 · Answer 2 · 2022-07-01T12:28:56+02:00

Compound interest is the form of interest that Andrea has accrued.

Compound Interest:

The interest you earn on interest is known as compound interest.
Simple math may be used to demonstrate this: If you have $100 and it generates 5% interest annually, you will have $105 at the end of the first year.
You will wind up with $110.25 at the conclusion of the second year.

Explanation -

Simply explained, compound interest is paid on both the deposit's principal amount and the interest paid on it.
It is interest on interest, according to this.
Andrea didn't withdraw her interest in the second year; instead, she reinvested it.
As a result, she received interest on both the initial amount deposited and the interest she had accrued the previous year in the following year.

Therefore, compound interest is the form of interest that Andrea has accrued.

Know more about Compound Interest here:

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