What is compounding in banking?

Compounding is the repeated addition of interest payments to the principal invested over a period of time. The principal grows exponentially as each new payment of interest is added to it. The higher the number of compounding periods, the greater the amount of compound interest will be.

What does compounded mean?

Compounding Definition: Compounding is the returns earned from interest on an existing principal amount, as well as on interest already paid means that, over time, you earn interest not only on your original investment (the principal) but also on the interest that has already been added to the principal.

What is compounding interest?

Compounding thus can be construed as interest on interest—the effect of which is to magnify returns to interest over time, the so-called “miracle of compounding.” When banks or financial institutions credit compound interest, they will use a compounding period such as annual, monthly, or daily.