Compound interest: interest continues to earn interest
Compound interest adds the interest generated in each period to the principal, allowing it to continue accruing interest in subsequent periods. It can increase the accumulated value of long-term savings, while also raising the cost of outstanding debt.
How compound interest works
The core of compound interest is adding accrued interest to the principal, so interest for the next period is calculated on a larger amount. Interest may be compounded daily, monthly, or annually; when the principal, annual interest rate, and term are the same, the number of compounding periods affects the total amount at the end of the term.
Formula and practical impact
The commonly used formula is A=P(1+r/n)^(nt): A is the total amount at the end of the term, P is the principal, r is the nominal annual interest rate expressed as a decimal, n is the number of compounding periods per year, and t is the number of years. The compounding frequency and term must use consistent units. Compound interest can allow savings to accumulate over time, but it can also increase the interest cost of debt that is not repaid on time.
Original Tutorial
https://www.binance.com/zh-CN/academy/glossary/compound-interest
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