Compound Interest
The compound-interest formula, compounding more often than yearly, the difference between compound and simple interest over two and three years, and how to read compound interest as repeated percentage change.
What you will be able to do
- Apply the compound-interest formula for yearly and more frequent compounding.
- Compute the gap between compound and simple interest for two and three years.
- See compound interest as a chain of identical percentage increases.
- Recover the principal or rate from a compound-interest fact.
What is inside this lesson
- 1What compound interest is
- 2The formula
- 3The gap between compound and simple interest
- 4Worked example: two-year compound interest
- 5Worked example: principal from the CI minus SI gap
- 6Worked example: half-yearly compounding
- 7Common mistakes
- 8Quick revision
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What compound interest is
Compound interest adds each period's interest back to the principal, so the next period's interest is calculated on a larger balance. Interest earns interest.
The practical effect is that the balance is multiplied by the same factor every period. After n periods the balance is the principal times that factor raised to the n. Reading compound interest as repeated percentage change, rather than a special formula, makes most questions quicker.
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