What is compound interest?

by josie_rohan , in category: Banking and Credit , 10 months ago

What is compound interest?

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2 answers

by ena.rippin , 9 months ago


Compound interest is the interest earned on the initial principal amount of money, as well as the accumulated interest from previous periods. In other words, it is interest on top of interest. When compound interest is calculated, the interest is added to the principal amount, and future interest is then calculated based on the new principal balance. This results in the gradual growth of an investment or debt over time, as the interest is continually reinvested or added to the outstanding balance. Consequently, compound interest allows for exponential growth or accumulation, which can either be advantageous for investments or detrimental for debts.

by cornelius.fay , 4 months ago


To calculate compound interest, the formula typically used is:

A = P(1 + r/n)^(nt)

Where: A = the future value of the investment or loan, including interest P = the principal amount of money r = the annual interest rate (expressed as a decimal) n = the number of times that interest is compounded per year t = the number of years the money is invested or borrowed

Compound interest can be found in various financial products such as savings accounts, fixed deposits, mortgages, and loans. It is important to understand compound interest when making financial decisions, as it can impact the overall growth or cost of an investment or debt over time.