{"id":25684,"date":"2022-06-14T07:40:06","date_gmt":"2022-06-14T07:40:06","guid":{"rendered":"https:\/\/www.5paisa.com\/finschool\/?post_type=finance-dictionary&#038;p=25684"},"modified":"2024-10-25T13:50:49","modified_gmt":"2024-10-25T08:20:49","slug":"compound-interest","status":"publish","type":"finance-dictionary","link":"https:\/\/www.5paisa.com\/finschool\/finance-dictionary\/compound-interest\/","title":{"rendered":"Compound Interest"},"content":{"rendered":"\t\t<div data-elementor-type=\"wp-post\" data-elementor-id=\"25684\" class=\"elementor elementor-25684\">\n\t\t\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-f87fca1 elementor-section-boxed elementor-section-height-default elementor-section-height-default\" data-id=\"f87fca1\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-98b79c7\" data-id=\"98b79c7\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-d41a956 elementor-widget elementor-widget-text-editor\" data-id=\"d41a956\" data-element_type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t<h2><span style=\"color: #000000;\"><strong>What is Compound Interest ?<\/strong><\/span><\/h2><p><span style=\"color: #000000;\">Compound interest\u00a0is the interest calculated on the principal and the interest accumulated over the previous period.\u00a0It is different from simple interest, where interest is not added to the principal while calculating the interest during the next period. In Mathematics, compound interest is usually denoted by C.I.<\/span><\/p><p><span style=\"color: #000000;\">Compound interest finds its usage in most of the transactions in the banking and finance sectors and other areas. Some of its applications are:<\/span><\/p><ol><li><span style=\"color: #000000;\">Increase or decrease in population.<\/span><\/li><li><span style=\"color: #000000;\">The growth of bacteria.<\/span><\/li><li><span style=\"color: #000000;\">Rise or Depreciation in the value of an item.<\/span><\/li><\/ol><ul><li><span style=\"color: #000000;\">Compound interest in simple terms means interest on interest. When the principal includes the accumulated interest of the previous periods and interest is calculated on this then they say it\u2019s compound interest. Compounding is done on loans, deposits and investments.<\/span><\/li><li><span style=\"color: #000000;\">Frequency of compounding is basically the number of times the interest is calculated in a year. Daily, weekly, monthly, quarterly, half-yearly and annually are the most common compounding frequencies.<\/span><\/li><li><span style=\"color: #000000;\">The higher the frequency of compounding, the greater the amount of compound interest. The frequency of compounding depends on the instrument. A credit card loan is usually compounded monthly and a savings bank account is compounded daily.<\/span><\/li><\/ul><h2><span style=\"color: #000000;\"><strong>How to calculate compound interest?<\/strong><\/span><\/h2><p><span style=\"color: #000000;\">Compound interest can be calculated with a simple formula.<\/span><\/p><p><span style=\"color: #000000;\">Compound Interest\u00a0= Total amount of Principal and Interest in future (or Future Value) less Principal amount at present (or Present Value)<\/span><\/p><p><span style=\"color: #000000;\"><strong>Compound Interest\u00a0= P [(1 + i) n \u2013 1]<\/strong><\/span><\/p><p><span style=\"color: #000000;\">Where P is principal,<\/span><\/p><p><span style=\"color: #000000;\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0I is interest rate,<\/span><\/p><p><span style=\"color: #000000;\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0n is number of compounding periods.<\/span><\/p><h5><span style=\"color: #000000;\"><strong>Frequency of Compound Interest Calculation<\/strong><\/span><\/h5><h2><span style=\"color: #000000;\"><strong>The compound interest calculator includes options for :<\/strong><\/span><\/h2><ul><li><span style=\"color: #000000;\">Daily compounding<\/span><\/li><li><span style=\"color: #000000;\">Monthly compounding<\/span><\/li><li><span style=\"color: #000000;\">Quarterly compounding<\/span><\/li><li><span style=\"color: #000000;\">Half yearly compounding<\/span><\/li><li><span style=\"color: #000000;\">Yearly compounding<\/span><\/li><\/ul><h2><span style=\"color: #000000;\"><strong>Why is compound interest better than simple interest?<\/strong><\/span><\/h2><p><span style=\"color: #000000;\">In compound interest, the investment grows much faster than the simple interest as the interest is paid on both investment as well as previous interest.<\/span><\/p><p><span style=\"color: #000000;\"><strong>Let\u2019s take an example:<\/strong><\/span><\/p><p><span style=\"color: #000000;\">Assume an investment of Rs 1 lakh is made. Let us see what would be the return with an option of simple and compound interest, given the rate of interest is 20% annually for a period of 3 years.<\/span><\/p><p><span style=\"color: #000000;\">The simple interest earned will be I= P*R*T\/100<\/span><\/p><p><span style=\"color: #000000;\">That is, I = 1,00,000*20*3\/100 = Rs. 60,000<\/span><\/p><p><span style=\"color: #000000;\">And in case of compound interest, amount is P (1 + r\/n) ^ nt<\/span><\/p><p><span style=\"color: #000000;\">That is,<\/span><\/p><p><span style=\"color: #000000;\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0A\u00a0 \u00a0 \u00a0 =1,00,000(1+0.2) ^3<\/span><\/p><p><span style=\"color: #000000;\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 = 1,00,000(1.728)<\/span><\/p><p><span style=\"color: #000000;\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0= 1,72,800<\/span><\/p><p><span style=\"color: #000000;\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Hence, I = A-P i.e. 1,72,800-1,00,000<\/span><\/p><p><span style=\"color: #000000;\">\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0= Rs 72,800<\/span><\/p><p><span style=\"color: #000000;\">Therefore, compound interest proves to be a good option for investment the return is higher than simple interest.<\/span><\/p><p><strong>Conclusion<\/strong><\/p><div class=\"flex-shrink-0 flex flex-col relative items-end\"><div><div class=\"pt-0\"><div class=\"gizmo-bot-avatar flex h-8 w-8 items-center justify-center overflow-hidden rounded-full\"><p class=\"relative p-1 rounded-sm flex items-center justify-center bg-token-main-surface-primary text-token-text-primary h-8 w-8\">In conclusion, compound interest is a powerful financial concept that emphasizes the importance of time and reinvestment in wealth accumulation. Unlike simple interest, which is calculated only on the principal amount, compound interest allows investors to earn returns not only on their initial investment but also on the interest that accumulates over time. This exponential growth can significantly enhance savings and investments, making it a critical factor in financial planning. Understanding compound interest encourages individuals to start saving early, remain consistent in their contributions, and take advantage of the compounding effect to achieve long-term financial goals.<\/p><\/div><\/div><\/div><\/div>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<\/div>\n\t\t","protected":false},"excerpt":{"rendered":"<p>What is Compound Interest ? Compound interest\u00a0is the interest calculated on the principal and the interest accumulated over the previous period.\u00a0It is different from simple interest, where interest is not added to the principal while calculating the interest during the next period. In Mathematics, compound interest is usually denoted by C.I. Compound interest finds its &#8230; <a title=\"Compound Interest\" class=\"read-more\" href=\"https:\/\/www.5paisa.com\/finschool\/finance-dictionary\/compound-interest\/\" aria-label=\"Read more about Compound Interest\">Read more<\/a><\/p>\n","protected":false},"author":1,"featured_media":25688,"parent":0,"menu_order":231,"comment_status":"closed","ping_status":"closed","template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"class_list":["post-25684","finance-dictionary","type-finance-dictionary","status-publish","format-standard","has-post-thumbnail","hentry","finance-dictionary-terms-c"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/finance-dictionary\/25684","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/finance-dictionary"}],"about":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/types\/finance-dictionary"}],"author":[{"embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/comments?post=25684"}],"version-history":[{"count":7,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/finance-dictionary\/25684\/revisions"}],"predecessor-version":[{"id":63145,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/finance-dictionary\/25684\/revisions\/63145"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/media\/25688"}],"wp:attachment":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/media?parent=25684"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}