Compound Interest

What is Compound Interest

When the simple interest is calculated for one year and its amount is considered as principal for the next year and the process is repeated it is called that the interest is compounded annually. The difference between the Final amount and the initial principal is called compound interest.

Important Points

  1. Principal changes in case of compound interest.
  2. Interest is calculated on accrued interest also.

Formula for compound interest

Compound Interest = A − P
= P(1 + r/100)t − P
= P[(1 + r/100)t − 1]
Amount (A) = P(1 + r/100)t
Principal = P
r is rate and t is time

When rate differs for each successive fixed period

If rates are r1%, r2%, r3%, ... then the amount is
A = P(1 + r1/100)(1 + r2/100) (1 + r3/100) ...

Applications

When value of a certain quantity changes at a fixed rate every year the formula of compound interest is useful.Some examples are Population and depreciation in value of an article.

Population

Depreciation

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