Answer
Compound interest can be thought of as accumulated interest, where interest in the future is paid on the original amount and the accumulated interest to date.
Work Step by Step
Compound interest can be thought of as accumulated interest, where interest in the future is paid on the original amount and the accumulated interest to date.
For example, if a principal of $\$1000$ has an interest rate of 10% and is compounded over two years, then the compound amount is found thus:
We use the interest formula (P=1000, r=0.1, t=1):
$I=Prt$
And apply it to each of the 2 years, adding the previous year's interest to the principal each time.
Year 1: $I=1000*0.10*1=100$
Year 2: $I=(1000+100)*0.10*1=110$
Thus the total compound amount is:
$1000+100+110=\$1210$
