Final answer:
Compound interest is the interest calculated on the principal amount plus all the accumulated interest that has not been paid. It involves adding the accrued interest back to the principal to calculate interest in the next period, thus 'compounding' the interest over time.
Step-by-step explanation:
The term for interest calculated on the sum by adding to the original principal all interest that has accrued and has not been paid is known as compound interest. Unlike simple interest, which is calculated only on the principal amount, compound interest involves calculating interest on the initial principal, which also includes all of the accumulated interest from previous periods.
In practice, to calculate the future value with compound interest, you use the formula:
Future Value = Principal x (1 + interest rate)^time
For example, to apply this to a three-year scenario with a principal of $100 and an interest rate of 5%, the calculation would look like this:
Future Value = $100 x (1 + 0.05)^3
After determining the future value, the compound interest is found by subtracting the present value of the principal from the future value.