In finance, compound returns cause exponential growth. The power of compounding is one of the most powerful forces in finance. This concept allows investors to create large sums with little initial capital. Savings accounts that carry a compound interest rate are common examples of exponential growth.

Is compound interest exponential growth or decay?

The equation for compound interest is A=P(1+r/n)^(tn). P is the value now (P for "Present"), r is the interest rate, t is the time that passes (in years), n is the number of times it compounds per year, and A is the future value.

Does compounding interest grow?

Because compound interest includes interest accumulated in previous periods, it grows at an ever-accelerating rate. In the example above, though the total interest payable over the three-year period of this loan is $1,576.25, the interest amount is not the same for all three years, as it would be with simple interest.