Interest paid on accumulated interest as well as on the capital invested. For example, $100 invested for one year at 5 per cent a year would yield $5 in its first year and at the end of the second year would pay 5 per cent on $105 (being the original $100 plus the $5 earned in the first year). The second year's interest would be $5.25, which would be added to the $105 when calculating the third year's interest entitlement. Under simple interest, 5 per cent would be earned each year on the capital invested, ie, the original $100 would yield $5 for each year it was invested. See also: flat rate of interest, simple interest.
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