What does compound interest mean?

Answer 1

compounding of interest refers to the action wherein, the interest paid to us over a period of time would increase gradually.

Ex: Lets say you invest Rs. 10000/- at 10% per annum which is compounded every quarter.

So interest for first quarter: Rs. 250/-

Principal at the end of first quarter: 10,250/-

Interest for second quarter: Rs. 256.25/-

Principal at the end of second quarter: 10,506.25/-

the increase in interest in the second quarter is because, the interest paid during the first quarter is also considered for interest payment in the second quarter. So, even though the principal amount we invested remains the same the interest varies because of compounding of interest.

The shorter the compounding period, greater is the interest earned.
Simple interest is to charge interest on the principle amount.

compound interest is the interest calculated on the simple interest!

Answer 2

Interest calculated on the accumulated unpaid interest as well as on the original principal.