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What is compound interest?

How is it calculated

If you lend money to someone you can expect to earn interest. This is like a fee paid for the privilege of borrowing your money. The interest is some agreed fraction of the loan amount. Suppose the period of the loan is 1 month. If at the end of the month your customer wants to keep borrowing for another month, he has actually borrowed the original sum plus the interest, so you earn the interest on the interest. The longer it goes on for the more and more you've lent. If the original sum lent was S and the rate of interest is R and the number of interest periods is N, then the sum you get back will be M when the day of reckoning comes. M = S (1+R)^N
24 March 2012
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