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The process of accumulating the time value of money forward in time. For example, interest earned in one period earns additional interest during each subsequent time period.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.


The process of earning interest on a loan or other fixed-income instrument where the interest can itself earn interest. That is, interest previously calculated is included in the calculation of future interest. For example, suppose someone had the same certificate of deposit for $1000 that pays 3%, compounding each month. The interest paid is $30 in the first month (3% of $1,000), $30.90 in the second month (3% of $1,030), and so forth. In this situation, the more frequently interest is compounded, the higher the yield will be on the instrument. See also: Amortization, Time value of money, Simple interest.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved


Compounding occurs when your investment earnings or savings account interest is added to your principal, forming a larger base on which future earnings may accumulate.

As your investment base gets larger, it has the potential to grow faster. And the longer your money is invested, the more you stand to gain from compounding.

For example, if you invested $10,000 earning 8% annually and reinvested all your earnings, you'd have $21,589 in your account after 10 years.

If instead of reinvesting you withdrew the earnings each year, you would have collected $800 a year, or $8,000 over the 10 years. The $3,589 difference is the benefit of 10 years of compound growth.

Dictionary of Financial Terms. Copyright © 2008 Lightbulb Press, Inc. All Rights Reserved.
References in periodicals archive ?
Compounding Solutions' average order is 2000 lb; it runs orders anywhere from 25 to 100,000 lb.
Every compound the company makes has a paper trail, a physical file that Compounding Solutions keeps on record after the material has been formulated.
Compounding Solutions' manufacturing operations are supported by a mechanical room, where the company houses its central chilling and nitrogen units and builds its own dies.
In 2016, Compounding Solutions expanded its R&D efforts with a 2000-[ft.sup.2] center--named after long-time employee Pete Goguen--equipped with both production- and lab-sized twin-screw compounding lines; a single-screw extruder; three injection molding machines; a two-roll mill; and dryers and ovens.
In the lab, Compounding Solutions has the full gamut of equipment for mechanical, physical, impact, rheological, and visual testing.