Compound Interest Principles

Compound interest is the interest that accrues on both the principal and the past unpaid accrued interest. Compound Interest is the only method which will do exact justice to both creditor and debtor. Compound interest is the interest computed on the face value of a loan or debt security or principal amount invested that is then added with the principal amount and then compounded again.  It generally occur when the interest is included to the principal therefore from that time on; the rate of interest which has been added also it earns interest and this addition of the interest to the principle is known as compounding. Compound interest could be earned, yearly, monthly, weekly or daily. Usually, the more times the amount is compounded, the more cash you could earn.  If you leave the interest earning account alone, by not eliminating money from it, you start earning more cash on your investment since the money which you make is added back to the principle amount. It is a simple fact that more money making interest helps you to earn more money.  Every time interest is compounded, the cash earned gets added to the total amount.

 Most of the banks, investments firms and others, would state how often your interest is compounded. In few cases, your investment does not compound, however makes money which is called as simple interest, which means you only earn cash on the amount you primarily invested and the profits are not reinvested in order to earn more cash.

Calculation of compound interest

A = p(1 + r/n)nt

A = the total amount

r= It is the annual nominal interest rate

P= initial investment or principal amount

T= number of years

n= number of times the interest is compounded per year

Questionnaire:

• What is compound interest?
• Give the formula for calculating compound interest?