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Compound Interest

 

If the interest earned after a specific period say a month, quarter, half year or one year is added to the principal for calculating the interest for the next period and so on, then the interest thus calculated is called COMPOUND INTEREST and is denoted by C.I.
 

The amount A due after n years, when a principal P is given on compound interest at the rate r % is given by –



 

and the compound interest C.I. is
 



 

In case the interest is payable half yearly at r % per annum, the amount after n years will be –
 



 

It may be noted that for the first year the S.I. and C.I. are equal and the difference between C.I and S.I on a sum for 2 years is the interest on the S.I. for one year.

 

Nominal and Effective Rate of Interest

 

                       
 

Where re means effective rate of interest and r means nominal rate of interest.





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