Simple and Compound Interest

How does interest accumulate?

Simple interest is earned only on the initial principal. With compound interest, interest from earlier periods becomes part of the balance that earns interest in the next period. The same annual rate therefore produces different balances.

Example

A principal of 1000 at 10 percent for two years earns 200 in simple interest and ends at 1200. Annual compounding gives 1100 after one year and 1210 after two. The rate is an illustration only.

Term and limits

Enter the nominal annual rate and compounding frequency separately. Do not enter a monthly rate in the annual rate field. Simple interest allows fractional years, while compound interest requires complete periods. Tax, fees and interim cash flows are excluded.

Read the periodic rate and period count together

The nominal annual rate is not the rate applied in every period. The tool divides the annual rate by periods per year and finds the total period count itself. Enter the annual rate as 12 and periods per year as 4 directly. For illustrative inputs of 2000 principal, a 12 % nominal annual rate, 4 periods per year and 0.5 years, the periodic rate is 3 %. The balance is 2060 at the end of the first period and 2121.80 at the end of the second. Interest earned is 121.80. These figures do not describe a product return or an offered rate.

Simple interest under the same conditions is 2000 × 0.12 × 0.5 = 120. The difference comes from the first period's interest earning interest in the next period. The effective annual rate is not this half year gain. It describes growth over a whole year if the periodic rate remains unchanged. Keep both the term and compounding frequency fixed when comparing. Principal and results must use the same currency. Additional deposits or withdrawals require separately dated cash flows, beyond this preliminary calculation from a single starting balance.

Frequently asked questions

How do I calculate compound interest?

With principal 1000, an example nominal annual rate of 10 percent and 1 compounding period per year, the total after 2 years is 1210.00, including 210.00 in interest. Each period adds interest to the balance for the next period. This preliminary estimate assumes a fixed rate and excludes taxes, charges and intermediate cash flows.

Calculate with these values