compound interest

noun

1. interest paid on both the principal and on accrued interest.

compound interest

noun

1. interest calculated on both the principal and its accrued interest Compare simple interest

compound interest

1. Interest computed on the original principal plus any accrued interest. Thus if 5% is the rate of interest per year and the principal is $1000, the compound amount after one year will be $1050, after two years it will be $1050 × 0.05 = $1102.50, after three years it will be $1102.50 × 0.05 = $1157.63, and so forth. Mathematically, if P is the original principal and I the rate of interest expressed as a decimal, the compound amount at the end of the n th year will be P (1 + I) ⁿ. The growth of the compound amount is exponential and not linear.

2. Compare simple interest

compound interest

1. Interest that is added not only to the principal of a loan or savings account but also to the interest already added to the loan or account; interest paid on interest.

Word History and Origins

Origin of compound interest¹

First recorded in 1650–60