Compound Interest

Compound interest is interest that accrues on both the initial principal and the accumulated interest from previous periods. Thus, over time, the principal increases exponentially. For example, a $1,000 loan earning compound interest at 10% per year would grow to $1,100 at the end of the first year. Then, based on the formula below, it would accumulate to $1,210 at the end of the second year:

Compound Sum = Principal (1 + Interest Rate) ^{Number of Periods}

$1,210 = $1,000 (1.10)²

By extension, the more frequently the compounding, the greater the yield will be.