Concept

Compound Interest

Compound interest is the interest earned depending on both the initial investment and previously earned interest. To find the balance of an account that earns compound interest, an exponential growth function can be used.
Compound interest formula
In this function, stands for the principal, or the initial amount of money, is the interest rate in decimal form, and is the number of times the interest is compounded per year. For an account with the principal and an annual interest of compounded twice a year, the balance in the account after years is shown in the graph.
Compound interest graph
Notice that the function grows continuously, whereas, in reality, the account balance only increases at the times of compound. When calculating compound interest, the number of compounding periods creates a difference. That is, the higher the number of compounding periods, the greater the amount of compound interest.
Compound interest graph for different n
Loading content