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