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Compound interest is an interest calculated on the principal and the existing interest together over a given time period. The interest accumulated on a principal over a period of time is also added to the principal and becomes the new principal amount for the next time period. Again, the interest for the next time period is calculated on the accumulated principal value.
Contrast with simple interest, where previously accumulated interest is not added to the principal amount of the current period, so there is no compounding.
Compound Interest Formula: Compound Interest = Amount – Principal A = amount P = principal r = rate of interest n = number of times interest is compounded per year t = time (in years).
The total compound interest generated is the final value minus the initial principal:
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