Compound Interest

Compound interest is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest.

 

Compound Interest Formula


A = P(1 + r)t

In the formula

  • A = Accrued amount (principal + interest)
  • P = Principal amount (amount borrowed or saved)
  • r =  interest rate as a decimal (usually written as a percent)
  • t = time in decimal years; e.g., 6 months is calculated as 0.5 years. Divide your partial year number of months by 12 to get the decimal years.

 

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