• Compound interest is a process in which interest is credited to the existing principal as well as to the interest already paid.

  • Thus, compound interest can be interpreted as interest on interest, the effect of which is to increase the return on interest over time, the so-called “miracle of compound interest.”
  • When banks or financial institutions charge compound interest, they will use an interest period such as annual, monthly or daily.
  • Compound interest can occur on investments where savings grow faster, or on debt where the amount owed can increase even as payments are made.
  • Compounding naturally occurs in savings accounts; some dividend-paying investments may also benefit from compound interest.