What Is Compound Interest?
Compound interest is interest calculated on your original principal and on all the interest that has already accumulated. Instead of only ever earning interest on the amount you started with (as with simple interest), each round of interest starts earning interest of its own — which is why compound growth accelerates the longer money is left to grow.
Compound Interest Formula
A = P × (1 + r/n)n×t
Where P is the principal, r is the annual interest rate (as a decimal), n is how many times interest compounds per year, and t is the time in years. The interest earned is simply A − P.
Why Compounding Frequency Matters
For the same stated annual rate, compounding more frequently produces a slightly higher effective return — quarterly beats yearly, monthly beats quarterly, and daily beats monthly. The difference is usually small over short periods but compounds (literally) into something meaningful over many years or at higher rates, which is why bank FDs, RDs and many bonds specify their compounding frequency explicitly.
Frequently Asked Questions
What is compound interest?
Compound interest is calculated on both your principal and any interest already added to it, so your balance grows faster over time than under simple interest, where interest only ever applies to the original principal.
Does compounding frequency really matter?
Yes — for the same nominal rate, more frequent compounding (monthly or daily vs yearly) produces a slightly higher effective return, since interest starts earning its own interest sooner.
What is the formula for compound interest?
A = P(1 + r/n)^(nt), where P is principal, r is the annual rate as a decimal, n is compounding frequency per year, and t is time in years. Interest earned is A minus P.