Compound Interest
Compound interest is the interest calculated on the original principal and also on the accumulated interest from previous periods. It is often described as "interest on interest." Unlike simple interest, where the interest stays the same every year, compound interest grows over time. This happens because the interest earned in the first year is added to the principal to create a new, larger principal for the second year. This cycle continues for the entire duration of the loan or investment.
Concepts (3)
This is the most basic form where interest is added once every year. The final amount depends on the principal, the rate of interest, and the number of years.
This is the most basic form where interest is added once every year. The final amount depends on the principal, the rate of interest, and the number of years. For example, if you invest ₹1,000 at 10% for 2 years, the amount is 1000 * (1 + 10/100)^2 = ₹1,210.
Examiners frequently ask for the difference between CI and SI for the same principal, rate, and time. This usually happens for 2 or 3 years. For 1 year, the difference is zero if compounded annually.
Examiners frequently ask for the difference between CI and SI for the same principal, rate, and time. This usually happens for 2 or 3 years. For 1 year, the difference is zero if compounded annually. For 2 years, the difference is simply the interest earned on the first year's interest.
When interest is added more than once a year, we must adjust the rate and time. For half-yearly, the interest is calculated every 6 months. For quarterly, it is calculated every 3 months.
When interest is added more than once a year, we must adjust the rate and time. For half-yearly, the interest is calculated every 6 months. For quarterly, it is calculated every 3 months. Example: For a 10% annual rate compounded half-yearly, use 5% as the rate and double the number of years in the formula.
Ready to practice? Start an interactive lesson.
Start Lesson: Annual Compounding Formula