Can comeone explain in simple layman's terms compound interest? Examples would be helpful. Thanks.?

Answer 1

Assume you have $100 invested, and you earn 5% interest in year zero (that's what it's called in finance). You now have $105, which earns 5% interest in year one.

Simply stated, compound interest is where your previous interest earnings are allowed to earn interest as well.

Answer 2

When you invest money at a particular rate of interest, you get back something extra at the end of the agreed period. This extra is the interest earned.Some transctions are such that the interest earned, if left with the borrower for a further period of time, would in itself earn interest at the agreed rate. This means that the interest earned earlier, earns further interest. This is called compound interest.
For example, if someone agrees to pay you 5% per annum compund interest on your say $ 10,000.00, the interest being computed at the end of 6 months from the date of borrowing, then the first half-year's interest on $ 10,000.00 @ 5% per annum would be $ $250.00. For the second half year, the interest would be payable on the original $10,000.00 plus on the earlier period's interest of $ 250.00, as the agreement is for compound interest on half-yearly basis. So the interest for the second half-year would be on $ 10,250.00 @ 5% per annum for 6 months which would be $ 256.25. Hence the effect of compund interest results in an additional interest of $ 256.25 over and above the interest earned earlier ($ 250.00). The extra interest earned for the second half-year ($ 6.25) results from compounding. Note that $ 6.25 is the interest on $ 250.00 (first half-year's interest) for the subsequent half year.
In the foregoing example, if there had been no compounding of interest (i.e. simple interest payment), you would have got a total interest of 5% on $ 10,000.00 for the whole year, which is $ 500.00, while compounding has given you an additional $ 6.25.

Answer 3

Compound interest is interest being added to your money over a period of time. Eg. $500 @ 10% for 3 yrs.so you would use the tables at the back of your text book to find the 10% for 3yrs and multiply it by the 500. Note you do not touch this money for the 3yr. Hope you have a text book or you will have to work it out which can take a lot of time.

Answer 4

Here is an excellent example of how paying investing fees can badly hurt you...in terms of losing compounding.

Look at the chart on this page:
http://www.retireearlyhomepage.com/advise.html

This example should give you an idea of how important compound interest is, and how fees can eat away at your investments over time.

If you pay 1% in fund fees (expense ratio and other 'hidden' fees), and 1% in a wrap account (for 'advice'), that's 2%. Look at that chart again. That 2% eats up an amazing amount of money over time. And 2% in fees is considered pretty reasonable!

Answer 5

Compund interest means interest made that will compound in a given time.
Example: You inevested $1.00. Intesrest of 10% compounds daily.

Day 1: You invest $1.00
Day 2: 1.00 plus your interest of .10 = 1.10
Day 3: 1.10 plus interest of 10% (.11) = 1.21
Day 4 : 1.21 plus interest of 10% (.12) = 1.33
Day 5: 1.33 plus interest (.13) = 1.46

Hope that this helps.

Answer 6

this is when money borrowed( principal) earns interest after a period of time.then the pricincipal and the interest is called amount. after this the total starts to earn interest. the time to pay interest is called period.and interest can be paid montlhly, quarterly ,half yearly ,yearly and so on.
example
if you borrowed $1000 at 12%p.a compound interest payable in two years.
amount=principal*(rate)to the power of2
or amount first year=PRT=1000*1.12*1=1120(TIME IS ALWAYS TAKEN TO BE ONE )
AMOUNT YEAR TWO=1120*1.12*1=1254.4
TOTAL AMUONT =$1254.4

Answer 7

The thing about compound interest is that you are no longer just earning interest on the money you invested or lent to somebody. You are earning it on the interest. In layman's terms, you are earning interest on interest. Interest is earned, and then as you leave that money in, you earn interest on what you have already earned as interest. The snowball effect . . .