Compound Interest

Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. Unlike simple interest (which only applies to the principal), compound interest causes wealth — or debt — to grow exponentially over time. The standard formula is A = P(1 + r/n)^(nt), where P is the principal, r is the annual interest rate as a decimal, n is the number of compounding periods per year, and t is the time in years. The more frequently interest compounds (daily vs. annually), the higher the effective annual yield. For example, $10,000 at 5% compounded annually for 10 years yields $16,288.95, while the same amount compounded daily yields $16,487.21.