Eight Standard >> Compound interest | Part-1

Compound interest Introduction

Compound interest is a powerful financial concept that can work in your favor over time. Compound interest encompasses interest earned on the principal amount as well as the interest that has accumulated from previous periods. This compounding effect can significantly boost your savings or investments.

To calculate compound interest, use the formula: \(A = P(1 +\frac{r}{n})^(nt)\), where:
A = the final amount after time t
P = the principal (initial amount)
r = the annual interest rate (expressed as a decimal)
n = the number of times interest is compounded per year
t = the number of years

Illustration: Calculate the compound interest of the some money Rs 5000 (principal) after 3 years of time period at the rate of 10% per annum.

Ans: -

To calculate the compound interest, we can use the formula:

\(A = P(1 +\frac{r}{n})^(nt)\)

Where: A = the final amount after time t P = the principal amount (Rs 5000 in this case) r = the annual interest rate (10%, which is 0.10 as a decimal) n = the number of times interest is compounded per year (assuming annually, n = 1) t = the number of years (3 years)

Now, let's plug in the values and calculate:

A =\( 5000(1 + \frac{0.10}{1})^(1*3)\)

A = \(5000(1 + 0.10)^3\)

A = \(5000(1.10)^3\)

A = \(5000 * 1.331\)

A = 6655

So, after 3 years, the compound interest on Rs 5000 at a rate of 10% per annum is (Rs 6655 - Rs 5000)= Rs 1655.