Compound Interest account

Compound interest: it is the interest which is calculated not only on the original principal invested, but also on the interest earned in privies periods.

10

A principal of Rupees 1000 invested at 10% would yield ___ x 1000

100

10

= Rupees 100 in the first year ______ x (1000 + 100) = Rupees 110 in the second year.

100

This contrasts simple interest in which interest is calculated on the original principal only, for all years.

Relation is between simple interest and compound interest.

Amount = A

Principal = P

Rate of interest = R

Time period = T

P = 3000

R = 10%

T = 2 years

R

A = P (1 + __.) T

100

In order to find out the compound interest at the end of the first year, apply the simple interest formal.

P x T x R

S.I = __________

100

3000 x 1 x 10

= ____________

100

C.I = S.I = 300 at the end of I year

Second year can be found out,

P = 3300. R = 10. T = 1 year.

P x T x R

C.I for 2 years = _________

100

3300 x 1 x 10

= ______________

100

C.I = 330

Therefore, total compound interest = 300 (end of the first year) + 330 (end of the second year

= Rupees 630.

The same compound interest can also be calculated by the following C.I formula

R.

C.I = P [(1 + ___.) T - 1]

100

10

= 3000 [(1 + ____.) 2 - 1]

100

= 3000 [(11) 2 -1]

____

10

121

= 3000 [.___ - 1]

100

(21)

= 3000 ____ = Rupees 630.

100