Compound Interest
Interest calculated on both principal and accumulated interest.
Compound interest calculates interest on both the original principal and any previously accumulated interest. The frequency of compounding (daily, monthly, annually) affects total returns or costs. Compounding works in your favor for savings and investments, but against you for debt, where it accelerates the total amount owed over time.
Formula
A = P × (1 + r/n)^(n×t), where P = principal, r = annual rate, n = compounds per year, t = yearsExample
A $10,000 business savings deposit earning 5% compounded monthly grows to $10,512 in one year, compared to $10,500 with simple interest—the $12 difference grows exponentially over time.
Why It Matters for Your Business
Compound interest is either your greatest ally (savings) or biggest enemy (debt), so understanding it helps you make better decisions about where to park cash and how quickly to repay loans.
Related Terms
More Banking Terms
ACH
Automated Clearing House - an electronic network for financial transactions.
APR
Annual Percentage Rate - the yearly cost of borrowing including fees.
APY
Annual Percentage Yield - the real rate of return on savings including compound interest.
Bank Reconciliation
Matching bank statements with internal records to identify discrepancies.
Business Checking
A bank account designed for business transactions.
Related Financial Guides & Resources
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