CHAPTER 8Calculation 2: Compound Interest

What It Means

With compound interest, you apply the interest rate to the original principal and also to all accumulated interest. This is different from simple interest, where you apply the interest rate only to the original principal amount.

How to Calculate

You can calculate the compound interest earned or the total amount after interest using any of several methods.

1. You can make a timeline to track the progress of the compounding. Consider $1,000 invested at 5% per year compounded annually:

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and so on.

At the end of the first year, $1,000 grows by 5% to $1,050. Unlike with simple interest, the $50 ...

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