Glossary of Compound Interest and Financial Terms

A comprehensive glossary of compound interest and financial terms to help you understand investment concepts and calculations.

About This Glossary

This comprehensive financial glossary contains definitions for terms related to compound interest, investments, savings, and financial calculations. Whether you're a beginner or experienced investor, this resource will help you navigate the complex world of finance with confidence.

Understanding these terms is essential for making informed decisions about your financial future and getting the most out of our Simple Compound Calculator.

For more detailed explanations on specific topics, be sure to explore our related guides linked throughout this glossary.

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A B C D E F G I L M N P R S T V Y

A

Annual Percentage Rate (APR)

The yearly interest rate charged for a loan or earned on an investment, expressed as a percentage. APR does not take into account the compounding of interest within the year.

Annual Percentage Yield (APY)

The effective annual rate of return taking into account the effect of compounding interest. APY is always equal to or higher than the stated interest rate when interest compounds more than once per year.

Amortization

The process of paying off debt through regular principal and interest payments over time. With amortization, each payment goes partially toward the loan principal and partially toward interest, with the proportion changing over the loan term.

Bond

A debt security where an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period at a fixed or variable interest rate. Some bonds use compound interest to calculate returns.

Bear Market

A market condition where prices of securities fall by 20% or more from recent highs amid widespread pessimism. Bear markets can significantly impact compound growth projections in investment portfolios.

Bull Market

A financial market where prices are rising or expected to rise. During bull markets, compound interest strategies can generate even more significant returns due to the combined effect of interest and market appreciation.

C

Compound Interest

Interest calculated on the initial principal and the accumulated interest over previous periods. Compound interest makes a sum grow exponentially rather than linearly, as with simple interest.

Compound Annual Growth Rate (CAGR)

The mean annual growth rate of an investment over a specified period longer than one year. CAGR smooths out the volatility of returns over time, providing a clearer picture of an investment's performance.

Compounding Frequency

The number of times per year that interest is calculated and added to the principal. Common frequencies include daily, monthly, quarterly, and annually. Higher compounding frequencies result in more interest earned over time.

Certificate of Deposit (CD)

A time deposit offered by banks and credit unions that typically offers a higher interest rate than regular savings accounts in exchange for leaving the money untouched for a specified period. CDs often use compound interest to calculate returns.

Compound Interest Formula

The mathematical formula used to calculate compound interest: A = P(1 + r/n)^(nt), where A is the final amount, P is the principal, r is the annual interest rate (as a decimal), n is the number of times compounded per year, and t is the time in years.

Continuous Compounding

The mathematical limit of the compound interest formula as the number of compounding periods approaches infinity. Calculated using the formula A = Pe^(rt), where e is the mathematical constant approximately equal to 2.71828.

Related Resources

Enhance your understanding of compound interest with these comprehensive guides: