What Is Compound Interest?
Definition
Compound Interest: Interest that is added to the balance at the end of each period, so the next period's interest is calculated on the larger balance: interest earns interest.
Compound interest is added to the balance at the end of each period, so the next period’s interest is calculated on the larger balance. In short, interest earns interest. For terms longer than one period, compound interest gives a higher final amount than simple interest at the same rate.
Where it appears in the formulas
A = P × (1 + r/n)^(n × t): P is the principal, r the nominal annual rate, n the number of compounding periods a year and t the term in years. The more often interest is added, the larger the final amount. The compound interest calculator applies this with yearly, monthly, weekly or daily compounding; the inflation and investment return calculators use the same compounding logic.