Compound interest is the interest which is calculated on both amount interest and principal amount. It means interest is calculated on the addition of the original amount of principal plus the amount of interest which is already earned by the bank.
Here is the formula to calculate an amount of compound interest as prescribed here.
A = P (1 + r/n )nt
A = amount
P = Principal
r = rate of interest
n = numbers of time per year, interest is compounded
nt = time in years
When you take a loan interest is calculated on the principal amount of loan. This interest is added into a principal amount to calculate next period interest amount and so on. Here is one example given to understand a concept of compound interest:
Let’s assume you borrow the money of Rs. 2000 over a period of 3 year at the interest rate 10% per year. The amount of interest is as follow.
1st year = 2000 x 10% = Rs. 200
2nd year= 2000+200 = 2200 x 10% = Rs. 220
3rd year= 2200+220 = 2420 x 10% = Rs. 242
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