math
compound interest
Compound interest is interest calculated on the original principal plus any interest already earned or charged. Each period, interest is added to the balance, so the next period's interest is computed on a larger amount. The more frequently interest compounds (annually, monthly, daily), the faster the balance grows. It contrasts with simple interest, which is calculated only on the original principal.
- Exam tip
- To compute compound interest year by year, multiply the new balance each time, not the original principal. Exams often include a simple-interest answer as a trap.
- Example
- $10,000 earns 5% compounded annually. After year one it is $10,500; after year two it is $10,500 × 1.05 = $11,025.
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Last verified: 2026-10-23