## What is Compound Interest and How Does It Works?

Compound interest is interest computed on the original principle plus all accumulated interest from prior periods on a deposit or loan. It is computed by multiplying the original principal amount by one plus the annual interest rate multiplied by the number of compound periods multiplied by one. Interest can be added at any time, from continuously to daily to annually.

### How Does it Calculated?

Compound interest is computed by multiplying the original principal amount by one plus the annual interest rate multiplied by the number of compound periods multiplied by one. The total initial loan amount is then deducted from the final value.

The following is the formula for computing compound interest:

Compound interest is the sum of the principal and interest in the future (or future value) minus the principal amount in the present (or present value)

= [P (1 + i)n] – P
= P [(1 + i)n – 1]
Where:

P = principal
i = nominal annual interest rate in percentage terms
n = number of compounding periods

Shares