A compound word is made when two words are joined to form a new word.
Definition
In English, words, particularly adjectives and nouns, are combined into compound structures in a variety of ways. And once they are formed, they sometimes metamorphose over time. A common pattern is that two words — fire fly, say — will be joined by a hyphen for a time — fire-fly — and then be joined into one word — firefly. In this respect, a language like German, in which words are happily and immediately linked one to the other, might seem to have an advantage. There is only one sure way to know how to spell compounds in English: use an authoritative dictionary.
There are three forms of compound words: the closed form, in which the words are melded together, such as firefly, secondhand, softball, childlike, crosstown, redhead, keyboard, makeup, notebook; the hyphenated form, such as daughter-in-law, master-at-arms, over-the-counter, six-pack, six-year-old, mass-produced; and the open form, such as post office, real estate, middle class, full moon, half sister, attorney general.
How a word modified by an adjective — "a little school," "the yellow butter" — is different from a compound word — " a high school," "thepeanut butter" — is a nice and philosophical question. It clearly has something to do with the degree to which the preceding word changes the essential character of the noun, the degree to which the modifier and the noun are inseparable. If you were diagramming a sentence with a compound word, you would probably keep the words together, on the same horizontal line.
Modifying compounds are often hyphenated to avoid confusion. The New York Public Library's Writer's Guide points out that an old-furniture salesman clearly deals in old furniture, but an old furniture salesman would be an old man. We probably would not have the same ambiguity, however, about a used car