Both Uses of
compound interest
in
David Copperfield
- These, it seemed, were calculations of compound interest on what he called 'the principal amount of forty-one, ten, eleven and a half', for various periods.†
Chpt 55-57 *
- After a careful consideration of these, and an elaborate estimate of his resources, he had come to the conclusion to select that sum which represented the amount with compound interest to two years, fifteen calendar months, and fourteen days, from that date.†
Chpt 55-57
Definition:
-
(compound interest) interest calculated on both the initial amount and on previous interest earned
(Example: $100 invested at 10% interest would earn $10 per year, but if interest is compounded annually, it would earn $11 the second year.)editor's notes: The more frequently interest is compounded, the more it will add up. Before computers were common, banks typically compounded balances each quarter. Today, it is easy to compound daily or even instantaneously (that is every instant); though increments in compounding frequency bring diminishing returns.
To compare rates with different compounding frequency, rates are often converted to an "Effective Annual Rate" (that is the equivalent rate if compounding were done annually); though the definition of this term is not universal.
When looking at loans, United States law creates a universal term, "Annual Percentage Rate (APR)" that converts a loan to it's equivalent cost if it were compounded annually. The APR also adjusts upward to reflect lender fees.