Answer:
Compound interest
is the concept of adding accumulated interest back to the principal,
so that interest is earned on interest from that moment on. A loan,
for example, may have its interest compounded every month, in this
case, a loan with $1000 principal and 1% interest per month would
have a balance of $1010 at the end of the first month. Interest
rates must be comparable in order to be useful, and in order to
be comparable, the interest rate and the compounding frequency must
be disclosed.
When $100
is invested in a bank or building society at 7% interest per year,
it grown by $7 to $107 at the end of the first year.
In the second year, interest is earned on the original $100
and on $7 interest. So at the end of the second year the investment
grows by $7 + $0.49 to $114.49. (This is more rapidly
calculated at $107 x 1.07.) At the end of the third year it
will have grown to $114.49 x 1.07 = $122.50 to the nearest
penny. When money grown in this way it is said to grow with compound
interest.
An initial amount P invested at r% per year grows to P (1
+ r/100)^{n} at the end of n years.
