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Compound Interest is the interest earned on the initial principal plus the interests earned over the previous periods of the loan. For eg. if Rs 100 is compounded annually at 10% p.a., then the principal for first year is Rs 100 and for the second year is Rs 100+ Interest earned during first year = Rs (100 + 10) = Rs 110.
Principal earned at the rate of interest compounded annually after a certain period of time can be calculated by using a
A = P $$[1+\frac{R}{100}]^n$$
A = Amount due
P = Initial principal
R = Rate of Interest (in % p.a.)
n = Time (years)
How much does Rs.1000 amount to in 2 years when it is deposited in a bank at 8% pa interest? The bank compounds interest semi-annually.
Explanation: Apply the formula
$$A = P[1+\frac{R}{x*100}]^{nx}$$
x = 1/0.5 = 2
$$A = 1000 [1+\frac{8}{2*100}]^{2*2}$$ = 1000 * $$ (1+\frac {4}{100})^{4}$$ = 1170
Please check the following link for tips, tricks, shortcuts and solved examples on Compound Interest: https://cracku.in/banking/quant/banking-interest/cheatsheet
