Compound Interest

The money lent or borrowed is called the principal.

Interest is the payment made for the money borrowed or lent.

The sum of principal and interest is called the amount.

The interest paid on `100 for a specified period is called rate.

The period for which money is borrowed or lent is called time period or time.

If the interest is calculated on the original principal for any given time and rate, then the interest is known as simple interest.

When the interest which becomes due is not paid to the moneylender, but is added to the principal, then this amount becomes the principal for the next period. The difference between the final amount and the original principal is called the compound interest.

One can find the compound interest by adding together the interest of consecutive periods. This is also called the “Compound Interest as Repeated Simple Interest”.

In case of simple interest, the interest is same every year. In case of compound interest, the interest increases every year. This is because of increase in principal.

Compound interest can be calculated by adding together the interest of consecutive periods or by using the Compound Interest Formula.

The amount can be calculated by using formulae when

    the period is n years and m months

    the interest is compounded half-yearly

    the interest is compounded quarterly

    the rates of successive years are different

If the value of an article (machinery, house, etc.) is decreasing year by year, then it is said that the cost of the article is depreciating.

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  • Q1

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  • Q2

    Find how much the sum of money P will be in 3 years if the rate of interests for 3 years is r1%, r2% and r3% respectively.

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  • Q3

    If the cost of a machine depreciates at r% p.a., then what will be its value after n years if its value is P today?

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  • Q4

    What is the amount for the principal P after a time interval t years when the rate of interest is r% per annum and the interest is compounded semi-annually?

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  • Q5

    Find the compound interest on 25,000 at 12% per annum for 3 years.

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