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 Stone Co., fearing that you wouldnt take its deal, decides instead to offer you compound interest on the same $13,000 note. How much will Stone pay you at the end of three years if interest is compounded annually at a rate of 5%? 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	5%)	Amount of Interest)
1	$13,000	$650	$13,650
2	$13,650	$	$
3	$	$	$