A more thorough explanation:

Compound interest is a type of interest that is earned on both the initial investment and any interest that has been accumulated over time. This means that the interest earned on an investment is added to the principal amount, and the new total amount earns interest again. This cycle continues, resulting in a larger return on investment over time.

For example, if you invest $1,000 in a savings account with a 5% annual interest rate, after one year, you will have earned $50 in interest. However, if you leave that interest in the account and continue to earn interest on the new total of $1,050, you will earn even more interest the following year. This compounding effect can result in significant returns over time.

Another example is a loan with compound interest. If you borrow $10,000 with a 10% annual interest rate and a term of 5 years, you will owe $16,386 at the end of the term. This is because the interest is added to the principal amount each year, resulting in a larger amount owed.

Compound interest is an important concept in finance and investing, as it allows for exponential growth over time. It is important to understand the effects of compound interest when making investment or borrowing decisions.