Compound interest is interest calculated on both the initial principal and all previously accumulated interest. Unlike simple interest, compound interest grows exponentially over time — often called "interest on interest."
A = P(1 + r/n)^(nt)
A = final amount, P = principal (initial investment), r = annual interest rate (decimal), n = number of times interest compounds per year, t = time in years
Example 1: $10,000 at 5% annual rate, compounded monthly, for 10 years
Result: $16,470.09 (interest earned: $6,470.09)
Example 2: $5,000 at 7% annual rate, compounded quarterly, for 5 years
Result: $7,073.91 (interest earned: $2,073.91)
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