What is Compound Interest?

Compound interest is the interest calculated based on the initial principal, which also includes all interest accrued from previous deposits or loans. Presumably from 17th century Italy, compound interest can be considered “flower interest,” and will make the amount grow at a faster rate than a simple interest, which is calculated only on the principal amount.

Calculating Compound Interest

Compound interest is calculated by multiplying the initial principal amount by one plus the annual interest rate raised to the number of compound periods minus one. Interest can be compounded on a specific frequency schedule, from continuous to daily to annual. When calculating compound interest, the number of compound interest periods makes a significant difference. The compound interest rate increases depending on the frequency of compound interest, so the higher the number of compound interest periods, the greater the compound interest.

Compound Interest Investment

An investor who chooses to re- invest plans in a brokerage account basically uses the power of planning in whatever they invest. Investors can also get compound interest by buying bonds without coupons. Traditional bonds provide periodic interest payments to investors based on the original conditions of the bond issuance, and this is paid to investors in the form of checks , interest does not increase.

Bonds without coupons do not send interest checks to investors; instead, this type of bond is bought at a discount to its original value and grows over time. Non-coupon bond issuers use the power of planning to increase the value of the bond so that it reaches full price at maturity .

 

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