This process of leaving your money and any accumulated interest in an investment for more than one period, thereby reinvesting the interest, is called compounding. Compounding the interest means earning interest on interest, so we call the result compound interest. (Simple interest) Future value of $100 at 10% Year 1 2 3 4 5 Beginning Amount $100 110 121 133.1 146.41 Total simple Interest Simple Interest $10 10 (0 10 10 50 Total Interest on Interest Interest on Interest $0 1 Z 3.31 4.64 11.05 Total Interest Total Interest Earned $10 71 12 13.31 14.64 61.05 Ending Amount $110 133.1 146.41 161.05

This process of leaving your money and any accumulated interest in an investment for more than one period, thereby reinvesting the interest, is called compounding. Compounding the interest means earning interest on interest, so we call the result compound interest. (Simple interest) Future value of $100 at 10%