# Compound Interest

We are usually familiar with the term $\text {Compound interest}$, if not scroll down and see!

#### Contents

## Definition

"Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it." - Albert Einstein

Compound interest is the basically the interest which is imposed on another interest. For example, if I take a loan of $\$1000$compounded annually such that the rate of interest is $10\%$, then my interest for the first year would be $10\%$ of $\$1000$ that is $\$100$. Then principal for the second year would be $1000+100=\$1100$. Then, the interest for the second year would be $10\%$ of $\$1100$ that is $\$110$.

So, we see that compound interest is the interest imposed on another interest.

## Basic examples

To calculate problems on compound interest, we need to be familiar of the term Simple interest.

## Compound vs. Simple

To better understand the difference, view the table below comparing the advantages and disadvantages of compound and simple interest.

Principal | $10,000 |

Rate | 5% (0.05) |

Time (years) | 4 |

Simple | $2,000 |

Compound | $2,155.06 |

Not too large a difference yet. Let's give it time.

Principal | $10,000 |

Rate | 5% (0.05) |

Time (years) | 20 |

Simple | $10,000 |

Compound | $16,532.98 |

Compound interest has essentially tripled (x2.65) your investment (**principal**). However, imagine that you loaned through compound. Certainly not something that happens. There isn't a "better" kind of interest. Simple and compound both have advantages and disadvantages. However, Albert Einstein certainly had an opinion on the matter.

**Cite as:**Compound Interest.

*Brilliant.org*. Retrieved from https://brilliant.org/wiki/compound-interest/