Compound interest is interest calculated on both the **initial principal** and the **accumulated interest** from previous periods.
Formula: **A = P(1 + r/n)^(nt)**
Where: - A = final amount - P = principal (initial investment) - r = annual interest rate (decimal) - n = times interest compounds per year - t = time in years
Example: $1,000 at 5% compounded annually for 10 years: A = 1000(1 + 0.05/1)^(1×10) = **$1,628.89**
Vs simple interest: 1000 × (1 + 0.05 × 10) = $1,500. Compound gives you $128.89 more — and the gap grows exponentially over time.