When you ______ a sum of money, you are calculating the value of money at a future time.

When you ______ a sum of money, you are calculating the value of money at a future time.

• A. compound
• B. discount
• C. invest
• D. borrow

Answer: (A)

Compounding is about growing a sum of money by earning interest on both the principal and the accumulated interest over time. When you compound a sum of money, you’re calculating what that amount will be worth in the future. For example, $100 at 5% annual compounding for two years becomes 100 × (1.05)^2 = 110.25, so about $110.25 in two years. This shows how the value increases over time due to compounding. Discounting would be determining the present value of a future amount, not its future value. Invest means putting money to work to earn returns in general, and borrow means obtaining money with an obligation to repay. Neither of those specifically describes calculating the future value through time-based growth, which is why compounding is the correct choice.

Compounding is about growing a sum of money by earning interest on both the principal and the accumulated interest over time. When you compound a sum of money, you’re calculating what that amount will be worth in the future. For example, $100 at 5% annual compounding for two years becomes 100 × (1.05)^2 = 110.25, so about $110.25 in two years. This shows how the value increases over time due to compounding.

Discounting would be determining the present value of a future amount, not its future value. Invest means putting money to work to earn returns in general, and borrow means obtaining money with an obligation to repay. Neither of those specifically describes calculating the future value through time-based growth, which is why compounding is the correct choice.