| The interest amount earned both on the original principal and on the accumulated interest. Compounding annually means that there is only one period each year in which interest is calculated. For example, if £100 is deposited with annually calculated interest at 10 percent, after one year there will be £110. Where simple interest always calculates the rate from the initial amount invested (giving £120 after two years, £130 after three etc.), compound interest calculates the 10 percent from the previous year's total (giving £121after two years and £133.10 after three). The extra £3.10 is the compound interest. |
