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Understanding Compound Interest

Compound interest is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods. This concept is essential for growing investments over time.

What is Compound Interest?

Compound interest is calculated on the initial principal, which also includes all the accumulated interest from previous periods on a deposit or loan. This effect can cause wealth to grow exponentially over time.

Key Components

Benefits of Compound Interest

Examples

Example 1: Savings Account

Consider a savings account with an initial deposit of $1,000 and an annual interest rate of 5%, compounded annually:

Example 2: Investment

An investor places $5,000 in an investment account with an annual interest rate of 7%, compounded quarterly:

Conclusion

Compound interest is a powerful concept in finance that can significantly impact the growth of investments over time. By understanding and leveraging compound interest, individuals can better plan their financial future and achieve their long-term financial goals.


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