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compound interest
noun
- interest paid on both the principal and on accrued interest.
compound interest
compound interest
- Interest computed on the original principal plus any accrued interest. Thus if 5% is the rate of interest per year and the principal is $1000, the compound amount after one year will be $1050, after two years it will be $1050 × 0.05 = $1102.50, after three years it will be $1102.50 × 0.05 = $1157.63, and so forth. Mathematically, if P is the original principal and I the rate of interest expressed as a decimal, the compound amount at the end of the n th year will be P (1 + I ) n. The growth of the compound amount is exponential and not linear.
- Compare simple interest
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Word History and Origins
Origin of compound interest1
First recorded in 1650–60
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