Applications of Compound Interest

What is compound interest?

Compound interest is the interest calculated on both the initial principal and the accumulated interest from previous periods. It’s different from simple interest, which is calculated only on the principal amount.

How does compound interest work?

Compound interest works by adding the accumulated interest back to the principal sum, so that interest is then calculated on the new, higher principal amount. Over time, this leads to exponential growth of the investment or loan.

What is the difference between compound interest and simple interest?

Simple interest is calculated only on the principal amount, whereas compound interest is calculated on both the principal amount and the accumulated interest from previous periods. This leads to faster growth with compound interest.

What is the rule of 72?

The rule of 72 is a quick and simple way to estimate how long it will take for an investment to double at a fixed annual rate of interest. It states that you divide 72 by the annual interest rate (in percent) to get an approximate number of years for doubling.

How often is compound interest compounded?

Compound interest can be compounded annually, semi-annually, quarterly, monthly, or even daily, depending on the terms of the investment or loan.

Compound interest is widely used in various financial products and investments, such as savings accounts, bonds, loans, mortgages, and investment portfolios. Understanding compound interest is crucial for making informed financial decisions and planning for the future.

In this article, we will explore the real-life applications of compound interest and how compound interest works.