What are compound interests in finance and how does it work?
In: Economics
Compound interest is repeatedly calculating interest on the accumulated principal and interest.
Eg. If you borrowed $100 at 10% interest rate per period, then after 1 period you own $100 + 10% * $100 = $110. Then the amount owed after 2 periods is $110 + 10% * $110 = $121.
The most common alternative is simple interest which means calculating the interest based on just the principal. Using the same example: period 1, $100 + 10% * $100 = $110, after period 2, $110 + 10% * **$100** = $120.
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