Compound interest

SRIDHAR

1Year B.com

23UCM034

Unit 2

Compound interest

Compound interest is the interest imposed on a loan or deposit amount. It is the most commonly used concept in our daily existence. The compound interest for an amount depends on both Principal and interest gained over periods. This is the main difference between compound and simple interest.

Suppose we observe our 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 or CI. In this article, you will learn what is compound interest, the formula and the derivation to calculate compound interest when compounded annually, half-yearly, quarterly, etc. Also, one can understand why the return on compound interest is more than the return on simple interest through the examples given based on real-life applications of compound interest here.  

Compound Interest Definition

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. In Mathematics, compound interest is usually denoted by C.I.

Also, try out: Compound Interest Calculator.

Compound interest finds its usage in most of the transactions in the banking and finance sectors and other areas. Some of its applications are:

1.Increase or decrease in population.

2.The growth of bacteria.

3.Rise or Depreciation in the value of an item.

Formula

Examples 1:

The count of a certain breed of bacteria was found to increase at the rate of 2% per hour. Find the bacteria at the end of 2 hours if the count was initially 600000.

Solution:

Since the population of bacteria increases at the rate of 2% per hour, we use the formula

A = P(1 + R/100)n

Thus, the population at the end of 2 hours = 600000(1 + 2/100)2

= 600000(1 + 0.02)2 = 600000(1.02)2 = 624240

Thank you 

J.SRIDHAR

23UCM034