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Do banks benefit from compound interest?

Banks benefit from compound interest lending money and reinvesting interest received into additional loans. Depositors benefit from compound interest receiving interest on their bank accounts, bonds, or other investments. The long-term effect of compound interest on savings and investments is indeed powerful.

What is compounding in banking?

Compounding is the repeated addition of interest payments to the principal invested over a period of time. The principal grows exponentially as each new payment of interest is added to it. The higher the number of compounding periods, the greater the amount of compound interest will be.

How do you compare bank products?

To compare bank products such as savings accounts and CDs, look at the annual percentage yield. It takes compounding into account and provides a true annual rate. Banks typically publicize the APY since it is higher than the interest rate.

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