What is the term for earning interest on previously earned interest?

The correct term for earning interest on previously earned interest is compound interest. This financial concept reflects the process where the interest earned on an investment or loan is reinvested, allowing the investor to earn interest on their initial principal and also on the accumulated interest over time. This leads to exponential growth of the investment as each compounding period adds to the overall balance, resulting in a greater total amount of interest earned over the long term.

In contrast, simple interest only calculates interest on the original principal, meaning that it does not take into account any previously earned interest. The annual percentage rate represents the yearly rate of interest, but it does not specifically refer to the concept of compounding. Dividend yield pertains to the ratio of dividends paid to shareholders relative to the price of the stock and is not related to how interest accrues on financial accounts.