Power of Compounding

Compound interest = total amount of principal and interest in future (or future value) less principal amount at present (or present value)

= P [(1 + i)n – 1]

Where:

P = principal

i = nominal annual interest rate in percentage terms

n = number of compounding periods

• Compound interest can significantly boost investment returns over the long term.
• While a $100,000 deposit that receives 5% simple annual interest would earn $50,000 in total interest over 10 years, the annual compound interest of 5% on $10,000 would amount to $62,889.46 over the same period.
• If the compounding period were instead paid monthly over the same 10-year period at 5% compound interest, the total interest would instead grow to $64,700.95.