Compound Interest
Interest refers to the fee that the borrower pays to the lender along with the principal amount. It is generally in the form of percentage. For instance, I borrowed an amount of Rs. 2000 from my friend, which I am supposed to pay back at 2% rate of interest. The interest is calculated on both the principal amount and on accumulated interest.
In the most general sense, compound interest is the interest on interest. While simple interest is calculated solely on the basis of the principal amount, compound interest calculated on both. The compound interest is directly proportional to the number of compounding periods, i.e. more the number of compounding periods, greater will be the interest.
Compound Interest Calculation
The formula for calculating compound interest is as follows:
[P (1 + i)n] – P
Where P stands for the principal amount, i stands for the rate of interest in the terms of percentage and n stands for the number of compounding periods.
For instance, Rs. 1000 compounded annually at the rate of 10% in 5 years will be:
[1000 x (1 + 10)5]-1000= Rs.1,610.51
Conclusion
Interest compounded monthly on an investment will yield you more than the interest which is compounded annually. If you are the one who has to pay compound interest on a credit card or a loan, then you will have to pay a lot of amount as compound interest is the interest charged on interest. While on the other hand, if you are receiving the compound interest you will always be benefited.
