Compound Interest Glossary

By Nathan Hays · Updated July 31, 2026

Twenty-eight terms you will meet on a rate sheet, an account statement, or in any explanation of how savings grow, each defined in two or three plain sentences. Where a term has a full guide of its own on this site, the entry links to it rather than repeating it. Numbers used as illustrations come from the same engine as the free compound interest calculator.

Jump to: APR · APY · Balance · CD · Compound interest · Compounding frequency · Continuous compounding · Contribution · Effective annual rate · Expense ratio · Fee drag · Future value · Inflation · Interest · Laddering · Maturity · Money market account · Nominal rate · Ordinary annuity · Periodic rate · Present value · Principal · Real rate of return · Rule of 72 · Simple interest · Term · Time horizon · Yield

A

Annual percentage rate (APR)

The standardized annual cost of borrowing, expressed as a percentage. For loans it bundles the interest rate together with required fees, which is why a loan's APR is usually higher than its quoted rate. APR does not include the effect of compounding, so a balance that compounds during the year costs more than the APR alone suggests. See APY vs APR.

Annual percentage yield (APY)

The standardized annual return on a deposit account with compounding already folded in. It answers the question "if I leave this money alone for a year, what percentage will the balance grow?" A 5% nominal rate compounded monthly is a 5.1162% APY and compounded daily is 5.1267% APY. Because the calculation is standardized, comparing APYs across institutions is an apples-to-apples comparison. See APY vs APR.

B

Balance

The total amount currently in an account: principal, plus every contribution made, plus every dollar of interest credited so far. In compound interest the balance is the base on which the next period's interest is calculated, which is exactly what makes compounding compound. Any fee or withdrawal reduces the balance and therefore reduces every future period's interest too.

C

Certificate of deposit (CD)

A deposit account that pays a fixed rate in exchange for leaving the money untouched for a set term. Withdrawing before maturity typically triggers an early withdrawal penalty defined in the account agreement. Because the rate and term are both fixed at the outset, the ending balance is knowable in advance. See the CD calculator.

Compound interest

Interest calculated on the current balance, which includes interest already earned, rather than on the original deposit alone. Each period therefore starts from a larger base than the one before it, and growth curves upward instead of running in a straight line. The formula for a lump sum is A = P times (1 + r/n) to the power nt. See how compound interest works.

Compounding frequency

How often interest is calculated and added to the balance: daily, monthly, quarterly, or annually. More frequent compounding produces a slightly higher result at the same nominal rate, but the effect is small. On $10,000 at 5% for ten years the balance is $16,288.95 compounded annually, $16,470.09 monthly, and $16,486.65 daily. See daily vs monthly compounding.

Continuous compounding

The mathematical limit of compounding as the number of periods per year approaches infinity, calculated as A = P times e to the power rt. It is a theoretical ceiling rather than a product feature, and it sits barely above daily compounding: $10,000 at 5% for ten years reaches $16,487.21 continuously against $16,486.65 daily. Useful for proving that frequency has a hard limit, and for little else.

Contribution

Money added to an account after the initial deposit, usually on a repeating schedule. Each contribution starts its own compounding clock from the moment it lands, so contributions made earlier in a term are worth more at the end than identical contributions made later. See monthly contributions.

E

Effective annual rate (EAR)

The rate that reflects what a year of compounding actually does, as opposed to the nominal rate that ignores it. On the deposit side this is what APY reports. On the borrowing side it explains why a 24% APR compounded daily costs about 27.11% over a full year if the balance is carried.

Expense ratio

An annual charge inside a pooled investment product, expressed as a percentage of the assets held. It is deducted before the return is reported, so it never appears as a line item on a statement and has to be read from the product's own disclosures. To model it, subtract it from your assumed rate. See how fees compound.

F

Fee drag

The cumulative effect of recurring fees on a compounding balance. The cost is larger than the fee itself, because the money removed would otherwise have gone on earning. On $25,000 at an illustrative 6% over thirty years, a 1% annual fee removes $38,871, or 25.8% of the fee-free balance. See how fees compound.

Future value (FV)

What a sum of money, or a stream of contributions, will be worth at a stated date given an assumed rate. It is the number the calculator on this site reports. For $10,000 plus $500 a month at 7% compounded monthly over 20 years, the future value is $300,850.72.

I

Inflation

The rate at which the general price level rises, which reduces what a fixed amount of money can buy. It compounds exactly the way interest does, only against purchasing power. A balance can grow in dollars and shrink in what those dollars will actually purchase. See inflation and compound interest.

Interest

The price paid for the use of money, expressed as a percentage of the amount over a period of time. When you deposit, you receive it; when you borrow, you pay it. Whether it compounds depends entirely on whether it is added back to the balance or paid out.

L

Laddering

Splitting a sum across several fixed-term deposits with staggered maturity dates, so that one portion becomes available at regular intervals. The structure trades some of the rate advantage of a single long term for more frequent access to part of the money. It is a scheduling arrangement, not a way of increasing the rate on any individual deposit.

M

Maturity

The date a fixed-term deposit or debt instrument comes due and the principal is returned. Until maturity, the rate and the term are fixed by the agreement. What happens at maturity, automatic renewal, transfer, or payout, is set by the account terms rather than by anything in the interest math.

Money market account

A deposit account that typically pays a variable rate and allows limited transactions, sitting somewhere between a savings account and a checking account in flexibility. Because the rate is variable, the ending balance cannot be known in advance the way a fixed-term deposit's can. Compare accounts of this type by APY.

N

Nominal rate

The stated annual rate before compounding is taken into account, sometimes called the stated or quoted rate. It is the number you type into the rate field of most calculators, including this one. A nominal rate is meaningless for comparison until you also know the compounding frequency, which is precisely the gap that APY exists to close.

O

Ordinary annuity

A stream of equal payments made at the end of each period. This site's calculator uses the ordinary annuity convention: interest is credited first, then the contribution is added, so a deposit earns nothing during the month it is made. The alternative, an annuity due, deposits at the start of each period and produces a slightly larger result.

P

Periodic rate

The nominal annual rate divided by the number of compounding periods per year, which is the rate actually applied at each crediting. A 6% nominal rate compounded monthly has a periodic rate of 0.5% per month. Compounding twelve periods of 0.5% produces slightly more than 6% over the year, which is the whole reason APY differs from the nominal rate.

Present value (PV)

The reverse of future value: what a future sum is worth today at an assumed rate, calculated as PV = FV divided by (1 + r) to the power t. At 5% compounded annually, $10,000 arriving in ten years has a present value of $6,139.13. This is the arithmetic behind the idea that money later is worth less than money now.

Principal

The original amount deposited or borrowed, before any interest is added. In the calculator it is the starting amount field. In a compounding balance, principal is the seed the whole curve grows from, and it is the one part of the final balance that was never earned.

R

Real rate of return

The return after inflation is removed, computed as (1 + r) divided by (1 + i), minus 1, where r is the nominal return and i is the inflation rate. At a 7% nominal return with 3% inflation the real return is 3.883%, not 4%. Real returns describe what a balance will actually buy. See inflation and compound interest.

Rule of 72

A mental shortcut for doubling time: divide 72 by the annual percentage return to get the approximate number of years for a sum to double. At 6% it predicts 12 years and the true answer is 11.9. It applies to a lump sum with no contributions, and it has no meaning for simple interest, which never doubles on its own. See the Rule of 72.

S

Simple interest

Interest calculated only on the original principal, so the amount credited is the same every period forever. The formula is A = P times (1 + r times t). At 5% on $10,000 over twenty years, simple interest produces $20,000 while annual compounding produces $26,532.98. See simple vs compound interest.

T

Term

The length of time an account, deposit, or loan runs, usually stated in months or years. For fixed-term products the term is contractual and ending it early carries a penalty. In the calculator, term is simply the number of years you run the projection for.

Time horizon

How long money will be left to compound before it is needed. Because compound growth is exponential in time and only linear in the amount deposited, the horizon is usually the single most powerful input in any growth calculation. See starting early vs starting late.

Y

Yield

A general term for the income an asset produces, expressed as a percentage of its value. On deposit accounts, the standardized version of yield is APY. The word is used loosely across product types, so it is worth checking what period the number covers and whether compounding is included before comparing two of them.

Frequently asked questions

Related reading: How compound interest works · Simple vs compound interest · Monthly contributions · How fees compound · Starting early vs starting late · APY vs APR · FAQ

All rates used as illustrations are assumed constant so the arithmetic is comparable. Real account rates change and returns vary. Educational only, not investment, tax, or financial advice.