compound interest

Definition

Interest which is calculated not only on the initial principal but also the accumulated interest of prior periods. Compound interest differs from simple interest in that simple interest is calculated solely as a percentage of the principal sum.

The equation for compound interest is: P = C(1+ r/n)nt

Where:
    P = future value
    C = initial deposit
    r = interest rate (expressed as a fraction: eg. 0.06 for 6%)
    n = # of times per year interest is compounded
    t = number of years invested

Use compound interest in a sentence

There was a compound interest, which made me wonder about a few things and how they applied to our current situation.

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After doing the math regarding the compound interest, we found the contract seemed agreeable to us and signed it that afternoon.

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We never took any money out of our bank account but continued to let it grow, and were able to take advantage of the magic of compound interest to earn an increasing amount each year.

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