Compound Interest


In compound interest the interest also earns an interest. Money is said to be lent in this when at the end of a year or other fixed period the interest that has become due is added top the sum and amount becomes the principal for the next period. This process should be repeated until the amount for the last period has been found. The difference between final amount and the original principal is called the C.I

Formula

A = P (1 + r100 x 1j ) n j
Where

A = Amount

P = Principal

r = Rate of interest

n = no of years

j = No of times of compounding done per year


Question 1:

Find the C.I on $64000 for 1 year at the rate of 10% p.a compound quarterly.

Solution:

 A = P [ 1 + (r⁄100) x 1⁄j ]^ n j


P = $ 64,000

r = 10 %

n = 1 year

j = 4 (compounding 4 times in a year)

A = 64,000   (1 + 10⁄100 x 1⁄4)^(1 x 4)

                     = 10,000  (1 + 10⁄100 x 1⁄4)^4

                     = 10,000  (1 + 0.025)^4

                     = 10,000  (1.025)^4

                    = 10,000  (1.1038)
   
                    = $ 11038

Question 2:

Find the C.I on $56000 for 1 year at the rate of 10% p.a compound quarterly.

Solution:

 A = P [ 1 + (r⁄100) x 1⁄j ]^ n j


P = $ 56,000

r = 10 %

n = 1 year

j = 4 (compounding 4 times in a year)

A = 56,000   (1 + 10⁄100 x 1⁄4)^(1 x 4)

                     = 14,000  (1 + 10⁄100 x 1⁄4)^4

                     = 14,000  (1 + 0.025)^4

                     = 14,000  (1.025)^4

                    = 14,000  (1.1038)
   
                    = $ 15453.2



Some Quotes

 Quote of Albert Einstein:

              " Compound interest is the 8th wonder of the world. He who understands it , earns it. .. He who does not . Pays it."

Other quotes:

             " It is the greatest discovery of all time."

             "It is more complicated than relative theory."

Here you can find five examples to understand this topic more clear

Compound Interest to Examples



        Students can try to solve the problems given in the link, on their own, and they can verify their  solutions with the solutions given. If you are having any doubt you can contact us through mail, we will help you to clear your doubts.

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