Definition for: Compounding
"Compounding" is term often used to describe the process of adding interest to the principal amount of a loan or investment and allowing, in effect, the interest to earn more interest. For example, compounding can measure the growth of an investment when dividends or interest are reinvested. For example, if you invest $10,000 and you receive a 6% interest rate on your investment, you will have $10,600 at the end of the first year (assuming yearly compounding), and if the $600 is reinvested at the same rate, the 6% interest on the principal for year 2 will be $636 (6% x $10,600).
