Compound Interest

Compound interest, abbreviated as CI, is the interest earned on an investment or paid on a loan.  It is the interest that is calculated not only on the initial principal amount but also on the accumulated interest of previous periods. In other words, it's interest on interest.

When you invest money or deposit it in a savings account that earns compound interest, the interest earned in each period is added to the principal for the next period's calculation. Over time, this leads to exponential growth in the value of the investment.

Compound interest is commonly used in various financial instruments such as savings accounts, certificates of deposit (CDs), loans, mortgages, and investment products like bonds and mutual funds.  It's an important in personal finance and investing because it allows your money to grow faster over time compared to simple interest, where interest is only calculated on the principal amount.

 

compound interest Formula

\( CI =  P \; [ \; 1 + ( r \;/\; n)^{nt} \;] \)

Symbol

\(\large{ CI }\) = compound interest

\(\large{ P }\) = initial principle

\(\large{ r }\) = annual interest rate

\(\large{ n }\) = number of compounding periods (daily, monthly, quarterly, semi-annually, or annually)

\(\large{ t }\) = number of time periods elapsed