Compound Interest Example

In banking when you are depositing money you always hear the word compound interest, so what does it mean. Well it refers to process where the banks or financial institutions would add the interest to your principal amount so that from next year even that interest would generate income.

It can be better understood with the help if an example, suppose an individual has deposited $1000 into bank at 10 percent interest rate for 5 years than at the end of 1st year he or she will not receive $100 rather bank would add that $100 to $1000 and in 2nd year an individual would be getting interest of $110 and not $100 as additional $10 is the interest income on interest for a person. This will keep happening till maturity and at the end a person would be getting more interest income under compound interest method than simple interest method.

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