![]() Moving forward with a similar calculation, the interest for the fourth year for Sania’s initial investment of Rs 50,000 will be calculated on this basis:ĥ0,000+5,000+5,550+6055 = Rs. ![]() Similarly, the interest for the third year will be calculated on this basis: 50,000+5,000+5,550 = Rs. Hence, the interest for the second year will be calculated on this basis: 55,000 (which is 50,000 plus 5,000) x 10/100 = Rs. Similarly, the interest for Sania’s second year will be calculated on the accumulated amount, i.e: 50,000 + 5000 = 55,000 With compound interest calculated on it, the interest for the initial year will be calculated on the below mentioned basis: 50,000 x 10/100 = Rs. Sania made an investment of Rs 50,000, with an annual interest rate of 10% for a time frame of five years. In order to understand this better, let us take the help of an example: The formula for calculating compound interest is A = P (1 + r/n) ^ ntįor this formula, P is the principal amount, r is the rate of interest per annum, n denotes the number of times in a year the interest gets compounded, and t denotes the number of years. The power of compounding lies in the fact that it essentially increases the investment amount every year by factoring in the interest amount generated earlier, thus, giving it a definite edge over simple interest. So basically, the interest is calculated on the compounding of the principal amount and the interest generated previously. This process is repeated throughout the investment’s tenure. It is called so because the accumulated interest is added to the principal amount and the interest for the upcoming period is calculated on the new amount, which is the principal amount plus the amount of the accumulated interest over the prior period. Simply put, when interest is added to the principal amount of an investment, loan or deposit, it is known as compound interest. Let’s understand what is compound interest and the use of the compound interest calculator in detail. Also, compound interest only further enhances your earnings time passes and lets your investment grow manifold. The possibilities of the power of compounding are endless, as the investment generates the ability to earn. Basically, compounding takes place when your earnings grow exponentially as you earn interest on your investment (principal amount and interest) as time passes.
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