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Interest is a fee paid to by the borrower of assets to the owner as a form of compensation for the use of borrowed money or money earned by deposited funds. Money is said to be lent at compound interest when at the end of a year or other fixed tenure, the due interest is not paid to the lender but is added to the sum lent and the amount thus obtained becomes the principle for the next period.
The process is repeated until the amount for the last of the period has been found. The difference between the original and the final amount is called compound interest.
Assume that Rs 6000 is invested in a bank under a compound interest of 10% p.a for 4 years. Find the amount at the end of 4 years?
Computing for 4 years, take the 5th row from the triangle i.e. 1 4 6 4 1
Amount = ( 1 × 6000 × 10 % 0 ) + ( 4 × 6000 × 10 % 1 ) + ( 6 × 6000 × 10 % 2 ) + ( 4 × 6000 × 10 % 3 ) + ( 1 × 6000 × 10 % 4 )
= 6000 + 2400 + 360 + 24 + 0.6
Note: For calculating the amount after n years, (n+1) th row of Pascal’s triangle should be used
Compound interest, like simple interest, is the interest paid on the investment. The difference is, this interest is then added to the principle. Once the interest has been added to the principle, it also begins to generate interest.
Taking the example of Rs 1000 invested at 10% per annum, the first year’s interest would amount to Rs 100 only. But the similarity ends, as soon as the interest gained is added to the original of Rs 1000 making it as total Rs 1100 for which interest is now calculated upon.
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Calculator Hut’s Compound Interest calculator is easy to use. Just enter Initial investment, the rate of interest and the time duration and click calculate. You will get the compound interest and also the total amount (CI + initial invested) you will get after the time duration. Compound frequency can change according to the problem. It may be yearly, quarterly or monthly.
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