![]() ![]() The formula used to calculate compound interest is M = P( 1 + i )n. Simply put, when interest is compounded, it is added back into the original sum. It is most commonly calculated when reinvesting earnings gained from interest on a sum back into the original deposit, thus greatly increasing the amount gained by the investor. Depending on whether compound interest is being earned or paid on a sum, it could either make a person much more money or cost them much more on a loan than simple interest.Ĭompound interest is interest on a principal sum and any of its accrued interest often called interest-on-interest. Compound interest is important for anyone making investments or repaying loans to understand how to profit the most from interest.
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