Compound Interest

Earning interest on interest.  For example, if someone deposits $1000 and after a year they earn $100 interest, the new balance becomes $1100 - $1000 of which was an original deposit and $100  interest.  Assuming all that remains in the account, during year two the $100 interest is now earning interest just like the original deposit is, so at the end of year two the balance would be $1210 ($1000 original balance, $100 interest from year 1 on the $1000, plus $110 interest on the $1100 for year two).  That's how "interest paid on interest" works.


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