Chapter 1
Linear Equations and Graphing
Course: Gre
Subject: Gre Quantitative Reasoning
Chapter: Rates Ratios And Financial Math
Introduction: Interest on Interest
Imagine you deposit money in a bank, and at the end of the year, you earn interest. Now, imagine that in the second year, you earn interest not only on your original deposit but also on the interest you earned in the first year. Your money is growing on itself—like a snowball rolling down a hill, gathering more snow as it goes.
This is the power of compound interest. While simple interest pays only on the original principal, compound interest pays on the principal plus any previously earned interest. Over time, this difference can be dramatic. This lesson will explain compound interest, how it works, and how it compares to simple interest.
Simple Interest vs. Compound Interest
Before diving into compound interest, let's review simple interest with an example.