compound interest

Compound interest, in finances, is a form of interest that builds interest upon its own growth. This is one of the two general types of interest, the other being simple interest. When simple interest is used, the interest only comes from the principal - the original amount of money that was placed in the account or for a loan. Depending on the side of the agreement you find yourself at, this can work both ways, to your disadvantage or to your advantage. If a loan uses simple interest, for example, the lender will receive much less money, whereas the person borrowing will pay much less in interest. A compound interest loan, on the other hand, would build interest upon the interest as it accrues. If the loan's interest is compounded monthly, this would mean that with each month, the interest would be recalculated based on a new principal (including that month's interest). Most loan companies, according to government mandate, present a yearly equivalent of their compound interest rates as an Annual Percentage Yield (APR)

Fast Facts

an interest is known to be continuously compounded if the compound frequency is extremely small

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How Mortgage Interest Tax Deductions Work

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Graduate Plus Loan

In an effort to encourage taxpayers to obtain Master’s, doctorate and other advanced degrees, the U.S. governm...
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Debt Securities

Debt securities are basically Promissory Notes that pay interest and the return of principal at the end of a s...
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What Is a Bond?

A bond is a debt instrument--basically an IOU--where an investor is loaning money to the US government, a stat...
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How to Buy a Home

The purchase of a house is probably the single largest financial investment that a person undertakes in their ...
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