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Compound Interest (CI)

While calculating compound interest which is calculated for the principle of first year, is added to the principle. The result of this addition becomes the principal for the next year. For this new principle, simple interest is calculated for second year and this interest is again added to the principal used for the second year. This new addition works as a principal for the third year and this process keeps going on . Finally, the original principal is subtracted from the last year’s amount. The result of this subtraction is called compound interest.

Let, Principle = P, Rate = R% per annum and Time = n yr

Amount = Principle + Interest (this formula is applicable for both SI and CI.)

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(a)   Amount = P (1 +

r/100

)ⁿ (in the case of compounded annually)

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(b)    Amount = P (1 +

r/200

)²ⁿ (in the case of compounded half-yearly)

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(c)    Amount = P (1 +

r/400

)⁴ⁿ (in the case of compounded quaterly)

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(d)    Amount = P (1 +

r/1200

)¹²ⁿ (in the case of compounded monthly)

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(e)    Compound = P [(1 +

r/100

)ⁿ - 1]

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Note :
(i) For first year or for one year simple interest and compound interest will be same .
(ii) The amount of n^th year will be the principle of (n + 1)^th year
(iii) Because of adding interest on principle, we get interest on interest .

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