Answer :
The phrase that BEST describes the concept of compound interest is "interest on interest."
1. Compound interest refers to the interest that is calculated on both the initial principal and the accumulated interest from previous periods. In simple terms, it means that you earn interest not only on the money you initially invested but also on the interest that money has already earned.
2. To illustrate this concept, let's say you invest $100 in a savings account with a 5% annual interest rate. After the first year, you would earn $5 in interest, making your total balance $105. In the second year, you would earn 5% interest not just on your initial $100 but on the full $105, resulting in earning $5.25 in interest. This process continues to compound over time, helping your money grow faster.
3. The other options provided do not accurately describe compound interest:
- "Cash from passive income" refers to earning money from investments without actively working for it.
- "Investments that support a social cause" refers to socially responsible investing, which focuses on both financial return and positive social or environmental impact.
- "A falling interest rate" simply indicates a decrease in the rate at which interest is earned, which is not directly related to compound interest.
Therefore, the correct choice that aligns with the concept of compound interest is "interest on interest."
