What is the Meaning of: Compound interest | Concept and Definition of: Compound interest
Interest is a concept which comes from latin and means "import." In the financial or economic sense, this term designates the value, usefulness, profit or gain something. It's also the benefit obtained by way of a placement.
In practice, the interest appears as an index expressed as a percentage. This index allows to estimate the cost of a credit ("my Bank gave me a mortgage at a fixed annual interest of 20% rate") or get an idea of the profitability of an investment ('my savings get me monthly approximately 0.25% interest").
The interest thus indicates how much money it is possible to get or how much we have to pay over a given period of time. An amount of 10,000 dollars with an annual interest of 10% means that the person repay at maturity, 11,000 dollars. Meanwhile, a time limit of 5000 euros per year to a 5 percent annual interest rate reports a gain of 250 euros.
The concept of compound interest concerns the benefit (or cost) of the primary principal sum at a rate of interest for a given time period where the obtained interests at the end of each period are not removed, but rather accumulated in the main capital. However, the interests are reinvested.
On the other hand, with a simple interest, the interest generated by the capital over a certain period does not accumulate to generate interest in the next period.
That said, unlike compound interest, simple interest generated by the capital invested will be the same during all periods of the placement at least that rate or maturity does not suffer changes.