AP MacroeconomicsMoney, Banking & Finance
Compound Interest
Compound interest is interest earned on both the original principal and on previously accumulated interest.
Because interest is added back to the balance, savings grow faster over time than with simple interest. The longer the time horizon and the higher the rate, the larger the compounding effect.
Formula / Example
Future value = Principal × (1 + r)ⁿ, where r is the rate per period and n is the number of periods.