Compound Interest: When the interest you earn on an investment is added to form the new base on which future interest accumulates, it is compound interest. For example, say you earn 5% compound interest on $100 every year for five years. You'll have $105 after one year, $110.25 after two years, $115.76 after three years, and $127.63 after five years. Without compounding, you earn simple interest, and your investment doesn't grow as quickly. For example, if you earned 5% simple interest on $100 for five years, you would have $125. A larger base or a higher rate provide even more pronounced differences. Compound interest earnings are reported as annual percentage yield (APY), though the compounding can occur annually, monthly, or daily.

 

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Compound Interest: When the interest you earn on an investment is added to form the new base on which future interest accumulates, it is compound interest. For example, say you earn 5% compound interest on $10 . . . View Full Definition

Simple Interest: If you earn simple interest on money you deposit in a bank or use to purchase a certificate of deposit (CD), the interest is figured on the amount of your principal alone. For example, if yo . . . View Full Definition

Periodic Interest Rate: The periodic interest rate, sometimes called the nominal rate, is the interest rate a lender charges on the amount you borrow. Lenders are also required to tell you what a loan will actually . . . View Full Definition

Interest Payments: Interest earned on reinvestment of each interest payment on money invested. See: compound interest.