When compounded 12 times per year at 2.5% annually, $1,000.00 will become $1,867.03 over the course of 25 years.
Compounding interest is the term for earning interest on top of interest you previously earned. This commonly comes up when thinking about savings. For example, you have $1000 in the bank, and it earns 4% interest per year compounded monthly. The compound interest formula lets you find the the balance after an arbitrary length of time, or "future value".
The compounding interest formula is futureValue = presentValue * (1 + periodInterestRate /
compoundingFrequency) ^ (compoundingFrequency * timePeriod). The compounding frequency is the number of times interest is paid out per
time period. This will typically be 12, for calculating monthly compounding
interest over a period of years. In the example above, the value in 5.5 years
would be
1245.62 = 1000 * (1 + 0.04 / 12) ^ (12 * 5.5).