Compound interest is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in compound effect book pdf next period is then earned on the principal sum plus previously accumulated interest. Compound interest is standard in finance and economics.
Compound interest may be contrasted with simple interest, where interest is not added to the principal, so there is no compounding. The simple annual interest rate is the interest amount per period, multiplied by the number of periods per year. For example, monthly capitalization with annual rate of interest means that the compounding frequency is 12, with time periods measured in months.
The frequency interest is compounded. The nominal rate cannot be directly compared between loans with different compounding frequencies. Both the nominal interest rate and the compounding frequency are required in order to compare interest-bearing financial instruments. To assist consumers compare retail financial products more fairly and easily, many countries require financial institutions to disclose the annual compound interest rate on deposits or advances on a comparable basis.
The effective annual rate is the total accumulated interest that would be payable up to the end of one year, divided by the principal sum. There may be charges other than interest. The effect of fees or taxes which the customer is charged, and which are directly related to the product, may be included. Exactly which fees and taxes are included or excluded varies by country.
200 BRL interest is credited to the account. 240 BRL in the second year. The interest on corporate bonds and government bonds is usually payable twice yearly.