compound interest

Compound Interest

In compound interest, the interest earned by the principal at the end of each interest period (compounding period) is added to the principal. The sum (principal + interest) will earn another interest in the next compounding period.

Consider \$1000 invested in an account of 10% per year for 3 years. The figures below shows the contrast between simple interest and compound interest.

Interest and Discount

The amount of money earned for the use of borrowed capital is called interest. From the borrower’s point of view, interest is the amount of money paid for the capital. For the lender, interest is the income generated by the capital which he has lent.

There are two types of interest, simple interest and compound interest.

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