Compound Interest

  • Compound interest (or compounding interest) is interest calculated on the initial principal, which also includes all of the accumulated interest of previous periods of a deposit or loan.
  • Compound interest is calculated by multiplying the initial principal amount by one plus the annual interest rate raised to the number of compound periods minus one.
  • Interest can be compounded on any given frequency schedule, from continuous to daily to annually.
  • When calculating compound interest, the number of compounding periods makes a significant difference.