What is Compound Interest?

Compound interest refers to the interest earned on both the initial principal amount of money invested or borrowed and on any accumulated interest from previous periods.

In other words, it is interest calculated on the initial principal and also on the accumulated interest of previous periods. Let’s take an example where 100 rupees are compounded for 2 years at a 10% annual rate of interest.

• At the end of 1 year, 100rs have become 110rs (i.e., 10% of 100rs).
• At the end of the second year, the final amount would be 121 rupees (i.e., 10% of 110 rupees).

Formula for Compound Interest

The formula to calculate compound interest is

Where,

• A represents the total amount of money after compounding,
• P represents the initial amount,
• r is the annual rate of interest,
• n represents the number of times interest is compounded in a year, and
• t represents the number of years.

Compound interest is widely used in various financial products and investments, such as savings accounts, bonds, loans, mortgages, and investment portfolios. Understanding compound interest is crucial for making informed financial decisions and planning for the future.

In this article, we will explore the real-life applications of compound interest and how compound interest works.