Compound interest is the interest imposed on a loan or deposit amount. It is the most commonly used concept in our daily existence. The compound interest for an amount depends on both Principal and interest gained over periods. This is the main difference between compound and simple interest.
Suppose we observe our bank statements, we generally notice that some interest is credited to our account every year. This interest varies with each year for the same principal amount. We can see that interest increases for successive years. Hence, we can conclude that the interest charged by the bank is not simple interest; this interest is known as compound interest or CI. Compound interest finds its usage in most of the transactions in the banking and finance sectors and other areas. Some of its applications are:
Increase or decrease in population.
The growth of bacteria.
Rise or Depreciation in the value of an item.
Compound Interest in Maths
In Maths, Compound interest can be calculated in different ways for different situations. We can use the interest formula of compound interest to ease the calculations. To calculate compound interest, we need to know the amount and principal. It is the difference between amount and principal.
Compound Interest Formula
As we have already discussed, the compound interest is the interest-based on the initial principal amount and the interest collected over the period of time. The compound interest formula is given below:
Compound Interest = Amount – Principal