What are compound interests in finance and how does it work?
In: Economics
Compound interest is essentially interest on interest. Say you have a principle (starting) amount and you reach your first interest period, so you get a percentage added onto the starting amount and it is reinvested so when the next investment period rolls around you will take that new sum and add a percentage of that amount and so on.
An example: you invest $1000 at 10% per year for 2 years.
The equation for compound interest is:
A=P(1+(r/n))^nt
A = your total
P = principle or initial amount invested
r = interest rate % (in decimal)
n = number of times interest is compounded in a period
t = number of time periods
In the example I gave the equation would look like this:
A=1000(1+(.10/1))^(1×2)
A = $1210.00
Hopefully that helped. If you need more explanation I will be happy to try.
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