The term Interest is the extra money paid by the institutions like banks or
post offices on money deposited with them. Interest is also paid by the people
when they burrow money.
COMPOUND INTEREST
If we observe the bank statements, we generally notice that some interest is
credited to our account every year. This interest varies with each year for the same
principal amount. We can see that interest increases for successive years. Hence,
we can conclude that the interest charged by the bank is not simple interest; this
interest is known as compound interest .
What is a compound interest?
Compound interest is the interest calculated on the principal and the interest
accumulated over the previous period. It is different from simple interest, where
interest is not added to the principal while calculating the interest during the next
period. It is usually denoted by C.I.
What is the formula for finding compound Interest?
Compound Interest = Interest on principal + Interest over existing interest.
So compound interest formula is given by:
compound Interest, C.I = Amount - Principal
where Amount ,A is given by:
where , A = Principal amount
r = rate of interest
t = time(no. of the years
n = no. of times interest is compounded per year
when we substitute A in C.I, we have:
where , C.I = Compound Interest
r = rate of interest
t = time (no. of years)
n = no. of times interest is compounded per year
p = principal
Rate Compounded Annually or Half Yearly
The C.I formula can be expressed for different situations such as the interest rate
is compounded yearly, half-yearly, quarterly, monthly, daily, etc.
if it is compounded annually then then n will be 1 in the given formula
if it is compounded half yearly for 1 1/2 year then n will be 1+1/2 = 3/2 in the given formula.
There are some situations where we could use the formula for calculation of
amount in CI. Here are a few.
(i) Increase (or decrease) in population.
(ii) The growth of a bacteria if the rate of growth is known.
(iii) The value of an item, if its price increases or decreases in the intermediate years
Some examples for finding compound Interest
HOW TO FIND COMPOUND INTEREST?
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