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Compound Interest

Posted on July 16, 2021July 16, 2021

What is Compound Interest?

Compound interest is interest that is calculated on the principal sum as well as the previous amounts of accumulated interest.  In essence, compound interest is interest that is paid on interest.

Compound Interest and Principal

If a business took out a loan for $3,000 for two years with conditions stating it was to be repaid with interest and principal, with the interest compounded annually at a rate of 10% per year, the interest would be calculated as follows:

Year 1

Principal Amount                    $3,000

Interest at 10%                       $  300

Accumulated Year-End         $3,300

Year 2

Principal Amount                    $3,300

Interest at 10%                       $   330

Accumulated Year-End         $3,630

What the Business Would Repay

So, if a business took out a loan for $3,000 for two years, that had an interest rate of 10% that was compounded annually, the amount the business would need to repay would be $3,630 at the end of two years.

Elaine Allan, BA, MBA

Technology & Business Blogger

Vancouver, BC, Canada

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