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Compound Interest
Interest calculated on the sum of a principal and accumulated interest from previous periods.
More Details
Compound interest is a type of interest that is calculated on both the initial principal and the accumulated interest of previous periods. This means that the interest someone earns in a given period is added to their principal, so that the balance of their account grows. This process continues over time, so that the amount of interest you earn compounds, or grows, over time.
Example
If you deposit $100 into a savings account that earns an annual interest rate of 5%, at the end of the first year, you will have earned $5 in interest, for a total balance of $105.
In the second year, the interest will be calculated on the new balance of $105, rather than the original $100. This means that you will earn $5.25 in interest in the second year (5% of $105), for a total balance of $110.25.
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