Understanding Compound Interest
Compound interest is interest computed on the initial principal along with all of the accumulated interest from previous periods. Unlike simple interest, which is calculated strictly on the initial amount, compounding accelerates capital accumulation exponentially.
Frequently Asked Questions
What is APY vs. APR?
APR (Annual Percentage Rate) does not account for interest compounding within the year. APY (Annual Percentage Yield) reflects the effective rate including compounded gains.
How does compounding frequency affect balance?
More frequent compounding cycles (such as daily or monthly instead of annually) yield higher final balances because interest is added back into the working principal balance sooner.