What is meant by "compound interest"?

Compound interest refers to the method of calculating interest not only on the initial principal amount but also on the interest that has already been accumulated over previous periods. This means that each time interest is calculated, it is applied to the total amount, which includes both the original principal and any interest that has been added to it. As a result, compound interest can lead to exponential growth of an investment or savings over time, as the interest itself begins to earn additional interest.

In contrast, interest that is calculated solely on the principal amount does not take into account any previously earned interest, resulting in lower overall returns. Additionally, a flat fee for withdrawals does not involve interest calculations at all and pertains to transaction costs rather than interest accrual. Lastly, interest that remains unchanged over time would be classified as simple interest, contrasting with compound interest’s dynamic nature where the interest continues to grow based on a larger balance over time. Thus, option B correctly captures the essence of compound interest.