Difference between revisions of "Compounding interest"
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'''Compounding interest''' is when interest earned adds to the principle for any future calculation of interest received. So a bank account that is compounded yearly that pays 4% interest and has $1,000 in the account would see the total value in the account be $1,040 after the first year ($1,000 * .04 = $40 interest earned), but it would increase to $1081.60 after the second year ($1,040 * .04 = $41.60 interest earned). As more time goes by, the amount of interest received will continue to increase. | '''Compounding interest''' is when interest earned adds to the principle for any future calculation of interest received. So a bank account that is compounded yearly that pays 4% interest and has $1,000 in the account would see the total value in the account be $1,040 after the first year ($1,000 * .04 = $40 interest earned), but it would increase to $1081.60 after the second year ($1,040 * .04 = $41.60 interest earned). As more time goes by, the amount of interest received will continue to increase. | ||
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| + | == See Also == | ||
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| + | * [[Simple interest]] | ||
[[Category: Economics]] | [[Category: Economics]] | ||
Revision as of 19:08, September 29, 2007
Compounding interest is when interest earned adds to the principle for any future calculation of interest received. So a bank account that is compounded yearly that pays 4% interest and has $1,000 in the account would see the total value in the account be $1,040 after the first year ($1,000 * .04 = $40 interest earned), but it would increase to $1081.60 after the second year ($1,040 * .04 = $41.60 interest earned). As more time goes by, the amount of interest received will continue to increase.
