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 nth year will be P(1 + I)^{n}. The growth of the compound amount is exponential and not linear. Compare simple interest.
Interest that is added not only to the principal of a loan or savings account but also to the interest already added to the loan or account; interest paid on interest.