# Compound Interest

## Compound Interest

Compound interest is interest computed at regular intervals so that bank depositors are receiving interest on the interest they earn.

If you put \$100,000 in the bank at 12% simple interest for 6 months, the calculation is as follows: \$100,000 x .12 yearly interest = \$12,000 for a whole year or half of that, \$6000 interest, for a half year.
If instead the interest is compounded monthly the calculation is as follows:

 Principal Yearly Interest Monthly interest \$100,000 (100,000 x .12) = \$12,000 (\$12,000 /12) =1,000 (100,000 + 1000 interest) =\$101,000 (101,000 x .12) = \$12,120 (\$12,120 /12) =1,010 (101,000 + 1010 interest) =\$102,010 (102,010 x .12) = \$12,241 (\$12,241 /12) =1,020 (102,010 + 1020 interest) =\$103,030 (103,030 x .12) = \$12,363 (\$12,363 /12) =1,030 103,030 + 1030 interest) =\$104,060 (104,060 x .12) = \$12,487 (\$12,487 /12) =1,040 (104,060 + 1040 interest) =\$105,100 (105,010 x .12) = \$12,612 (\$12,612/12) =1,051 TOTAL INTEREST \$6,151

You get \$151 more in interest because you got interest on your interest. If you have a mortgage, you pay more interest because the interest you OWE is compounded monthly.

There is currently no content classified with this term.

Get instant access to step-by-step instructions on how to apply and sit for the CPA Exam.