Compound Interest

Compound interest (or compounding interest) is interest calculated on the initial principal, which also includes all of the accumulated interest of previous periods of a deposit or loan. Thought to have originated in 17th century Italy, compound interest can be thought of as “interest on interest,” and will make a sum grow at a faster rate than simple interest, which is calculated only on the principal amount.

The formula for calculating compound interest is:

Compound Interest = Total amount of Principal and Interest in future (or Future Value) less Principal amount at present (or Present Value)

= [P (1 + i)ⁿ] – P

= P [(1 + i)ⁿ – 1]

(Where P = Principal, i = nominal annual interest rate in percentage terms, and n = number of compounding periods.)