Compound Interest

explain by Example:

Let's say you invest $1000 at 8% simple interest.
This means that at the end of the first year you would have $1000 + .08*1000 = $1080.

Now suppose the bank said we will give you interest twice a year. This would be compound interest. You would get not 8% but 4% after 6months so you would have 1000 +.04*1000 = $1040 after 6monts. Then at the end of the year you would get $1040 +.04*1040 = $1,81.60. So compounding twice a year gained you $1.60. Not a big deal?

Well suppose we compounded once a month. Then eac month you would not get 8% interest, but 8/12% interest.

Now you us e your formula FV = 1000(1+.08/12)^12 = $1083.
Wow!! Now you have made a full 3 dollars mor than just simple, non-compounded interest,

Now you can continue this compounding daily, hourly every second or what is called continuous compounding. Let me just say that compounding gets you more than simple interest, but not a whole lot. Daily compounding gets you 27 cents a year more than monthly compounding.

Hope this helps you understand compound interest a little better.