Compound Interest
Interest calculated on both the principal and the accumulated interest from previous periods.
Definition
Compound interest is the interest earned on an investment or charged on a loan that is calculated on both the original principal and the interest accumulated from previous periods. Unlike simple interest (calculated only on principal), compound interest grows exponentially over time ”” often called the 'eighth wonder of the world.' The compounding frequency (daily, monthly, annually) affects the effective rate. The formula is A = P(1 + r/n)^(nt), where P is principal, r is annual rate, n is compounding periods, and t is time in years.
Example
“$10,000 invested at 7% annual compound interest grows to approximately $19,672 in 10 years ”” nearly double without adding more money.”
Usage Examples
- 1
“Thanks to compound interest, a ₹10,000 investment at 12% p.a. grows to over ₹1 lakh in 20 years.”
- 2
“The credit card statement shocked him — compound interest had doubled his ₹50,000 balance in just four years.”
When & How to Use
Use when calculating how an investment or debt grows when interest is reinvested or added to the principal over successive periods.
- ▸Projecting the long-term value of a SIP (systematic investment plan)
- ▸Illustrating why credit-card debt grows so rapidly when only minimum payments are made
- ▸Comparing daily vs monthly compounding frequencies on a savings account
Etymology & Origin
Latin 'componere' (to put together) + 'interesse'. The phrase 'compound interest' appeared in English financial texts by the 17th century.
History & Evolution
The mathematics of compound interest was formalised by Jacob Bernoulli in 1683, who discovered the constant e while studying continuous compounding. Einstein allegedly called it the 'eighth wonder of the world', though the attribution is disputed.
Synonyms
- compounding returns
- exponential growth
- interest on interest
- geometric growth
Antonyms / Opposites
- simple interest
Images
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Related Terms
- interest-rate
- time-value-of-money
- apr
- savings