Compound Interest

Compound interest is a concept in finance where interest is not only calculated on the initial principal amount but also on the accumulated interest of previous periods. In other words, it’s interest on interest.

Compound interest is a powerful concept in finance because it allows investments to grow exponentially over time. It’s commonly used in savings accounts, certificates of deposit (CDs), bonds, loans, mortgages, and other financial products. However, it’s important to note that while compound interest can work in your favor when you’re saving or investing, it can also work against you when you’re borrowing money, as the debt grows more quickly over time.

The formula to calculate the future value of an investment with compound interest is:

𝐴=𝑃(1+𝑟/𝑛)𝑛𝑡A=P(1+r/n)nt

Where:

• $A$ = the future value of the investment/loan, including interest
• $P$ = the principal investment amount (the initial deposit or loan amount)
• $r$ = the annual interest rate (in decimal)
• $n$ = the number of times that interest is compounded per year
• $t$ = the time the money is invested for, in year