Compound Interest

Compound interest is the interest calculated on both the initial principal and the accumulated interest from previous periods. It allows investments or savings to grow at an accelerating rate over time, as interest is earned not only on the original amount but also on any interest already accrued. The formula for compound interest is: A = P(1 + r/n)^(nt), where A is the final amount, P is the principal, r is the annual interest rate, n is the number of times interest is compounded per year, and t is the time in years.

Example

An initial investment of $1,000 with an annual interest rate of 5%, compounded monthly, will grow faster than simple interest because each month, interest is earned on both the principal and previously accrued interest.