Compound interest With compound interest, the interest is added to principal in the calculation of interest in future periods. This addition of interest to the principal is called compounding. This differs from simple interest, in which interest is computed based upon only the principal. The frequency with which interest is compounded per year will dictate how many interest computations are required (i.e. annually is once, semi-annually is twice, and quarterly is four times). Imagine that Ross Co., fearing that you wouldn't take its deal, decides instead to offer you compound interest on the same $16,000 note. How much will Ross pay you at the end of three years if interest is compounded annually at a rate of 7%? If required, round your answers to the nearest cent. Principal Annual Amount of Accumulated Amount at Amount at Interest (Principal at End of Year (Principal at Beginning of Beginning of Year x Beginning of Year + Annual Year Year 7%) Amount of Interest) 1 $16,000 $1,120 $17,120 2 $17,120 $ $ 3 $ $ $ If you were given the choice to receive more or less compounding periods, which would you choose in order to maximize your monetary situation? More