compound interest


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Related to compound interest: simple interest

Compound interest

Interest paid on previously earned interest as well as on the principal.

Compound Interest

The interest on a loan or other fixed-income instrument where interest previously paid is included in the calculation of future interest. For example, if one has a certificate of deposit for $1,000 that pays 3% in interest each month, The interest paid in the first month is $30 (3% of $1,000), in the second month it is $30.90 (3% of $1,030), and so forth. The more frequently interest is compounded, the higher the yield will be on the instrument. See also: Amortization.

compound interest

Interest paid both on principal and on interest earned during previous compounding periods. Essentially, compounding involves adding interest to the sum of principal and any previous interest in order to calculate interest in the next period. Compare simple interest. See also frequency of compounding.

Compound interest.

When the interest you earn on an investment is added to form the new base on which future interest accumulates, it is compound interest.

For example, say you earn 5% compound interest on $100 every year for five years. You'll have $105 after one year, $110.25 after two years, $115.76 after three years, and $127.63 after five years.

Without compounding, you earn simple interest, and your investment doesn't grow as quickly. For example, if you earned 5% simple interest on $100 for five years, you would have $125. A larger base or a higher rate provide even more pronounced differences.

Compound interest earnings are reported as annual percentage yield (APY), though the compounding can occur annually, monthly, or daily.

compound interest

see INTEREST.

compound interest

the INTEREST on a LOAN that is based not only on the original amount of the loan but the amount of the loan plus previous accumulated interest. This means that, over time, interest charges grow exponentially; for example, a £100 loan earning compound interest at 10% per annum would accumulate to £110 at the end of the first year and £121 at the end of the second year, etc., based on the formula:

compound sum = principal (1 + interest rate") number of periods that is, 121 = 100 (1 + 0.1)2. Compare SIMPLE INTEREST.

compound interest

The process of charging, or earning, interest on interest. Interest accrued in prior periods is added to the principal,and then interest in the current period is calculated on the total.

Example: If you saved $100 per month, starting at age 25, at an earnings rate of 5 percent per annum, you would have $144,959 by age 65, only $48,000 of which would be money you contributed. To perform your own calculations, use the following formula to create a Microsoft Excel spreadsheet:

FV(Interest Rate, Number of Years, Savings per Year)*-1

For Interest Rate enter the cell address where you will note the interest rate you expect to earn; for Number of Years enter the cell address where you enter the number of years you expect to save the same amount each year; and for Savings per Year enter the cell address where you will enter the amount you expect to save each year.

References in periodicals archive ?
Once cited as the 'eighth wonder of the world' by Albert Einstein who also said, 'those that understand it, earn it; those that do not, pay it', compound interest is a relatively low-intensity way of reliably maturing your investment over the long term.
Shalchi said the figure is just an example to show how people can use the power of compound interest to their advantage.
Answers to questions about the compound interest topic were considered "correct" if either item was answered correctly.
Compound interest can be thought of as "interest on interest." It is the interest amount calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan.
Interestingly, effects are larger when baseline knowledge is modest, as with the tax treatment of retirement savings plans, and smaller when knowledge is higher, as with compound interest and inflation.
Correct?" "I suppose so." "So if you spend PS4,368 a year, during the past 20 years you have spent the equivalent, at today's prices, of PS87,360." "If you say so." "Do you Know that if you didn't drinK beer, that money could have been put in a high interest savings account and, after adding compound interest, you could have now bought a Ferrari?" And the man said: "Do you drinK beer?" "No," said the woman, proudly.
Then learning can grow exponentially - another example of compound interest at work.
He charged compound interest of more than 700,000 per cent to clients on the breadline.
She explains why we'd rather earn compound interest on our bank account than pay compound interest on our credit cards.
Instead of allowing youngsters to be taught, by a company which issues "credit" at huge profit, how to survive the duty of borrowing our means of exchange into existence at compound interest, shouldn't we be questioning the wisdom of preserving, at vast expense to the electorate, a system which they would never have sanctioned, had they been consulted?
In January, the CPA launched an investigation into whether the Saudi Credit Bureau had been charging compound interest. "Banks do not have the right to impose compound interest when they finance clients," Al-Tuwaim reportedly said, adding that no case would be closed until it had been thoroughly checked and necessary actions taken.
Leon awarded McKesson $20 million for the value of Pak plus $23.9 million in compound interest. Last Tuesday, an appeals court in Washington reversed the decision to grant compound interest and sent the decision back to the lower court to recalculate the award based on simple interest.