Compound Interest: Time Makes a Difference
Compound interest is earning interest on interest that has already been added.
The calculation depends on the rate and the compounding frequency. In investments returns can vary and be negative, so an example with fixed interest is just an illustration. Fees, taxes and withdrawals change the outcome.
Assuming a constant 5% per year: 100 ₪ becomes 105 ₪ after one year and 110.25 ₪ after two years, before costs.
Calculate the amount after the third year under the same assumption.
Investor.gov · Compound Interest ↗Check your understanding
In the example, how much is there after two years?
- 110 ₪
- 110.25 ₪
- 150 ₪
Answer and explanation
110.25 ₪. In the second year 5% is calculated on 105, not only on 100.
Does the 5% example guarantee a market return?
- Yes
- No
- Only in the long term
Answer and explanation
No. This is an arithmetic assumption for learning, not a forecast.
Continue learning
Bonds: When You Lend Money — A bond is a security that represents a commitment by the issuer toward the holder.
Fees: Small Numbers Add Up — Commissions and management fees are costs that reduce the investor's outcome.