Interest

The charge you pay if you borrow money, and the income you receive if you lend it or invest it in an income-producing bank account or in a security like a bond or a gilt.

For example if you borrow £1,000 at an interest rate of 10% per year, the interest payable is £100 per year. Loans are sometimes made at fixed rates of interest, and sometimes at variable rates.

If you invest £1,000 at 10%, then you as lender expect to receive £100 interest. If instead of spending the interest, you reinvest it in the same security, then at the start of the second year you will have £1,100 invested and attracting 10%, so at the end of the second year you expect to receive £110 interest. This is the principle of compound interest, where you get rolling interest on your original capital and on the reinvested income.