# compound interest

Definition
Related Terms
Interest computed on the principal amount to which interest earned to-date has been added. Where compound interest is applied, the investment grows exponentially and not linearly as in the case of simple interest. Formula: Principal x {(Annual interest rate ÷ 100) + 1}^number of years. For example, \$1,000 at an annual compound interest rate of 10 percent will, in 5 years, be: 1000 x {(10 ÷ 100) + 1}^5 = \$1,6105.51.

## Use 'compound interest' in a Sentence

I agreed to a loan and before I knew it I owed much more in interest than I thought I would because my loan used compound interest.
Mary put a few hundred dollars in a money market fund as a child and because of compound interest it was worth much more to her then the few thousand she invested later in life .
His principal investment wasn't yet paying off big money, but Jordan knew it would take a little time before the compound interest kicked in, at which point he'd see a sharp rise in what he was getting back.

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