Question

What is Compound Interest? Can you explain each term in the formula used to calculate compound interest?

Answer 1

Hi ,

In simple interest the principal remains the

same throughout the period.

Some times the interest is added to principal

and the total amount is takes as principal

for the next year. Thus both principal and

interest on successive years keep on

increasing . This kind of calculation is named

as Compound Interest.

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A = P( 1 + R/100 )ⁿ

where ,

P = Principal ,

A = amount

R = rate of interest for the period of one

computation

n = Number of times that interest has to be

computed

Formula for Compound Interest

C.I = A - P

= P( 1 + R/100 )ⁿ - P

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I hope this helps you.

: )

Answer 2

Compound interest is calculated by multiplying the initial principal amount by one plus the annual interest rate raised to the number of compound periods minus one.

According to formula,

An = P( 1 +r/100)

Where A is total amount after n years, r is the rate. P is the amount initially

An =10, 000( 1 + 10/100)

=10,000( 1+0.1)"

=10,000(1.1)

An =10,000(1.1)

now, put n = 1 A1 =10, 000(1.1), put n =2, A2 =10,000(1.1)2

in the same way, A3 =10, 00(1.1)

you can see that A2/A1 = A3/A2

so, {An} is in Geometric progression.

now,

amount payable after 5years

A5 =10,000(1.1)^5

=16, 105.1 Rs

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