Compound Interest
Final amount when interest is added back each period.
A = P\left(1 + \dfrac{R}{100}\right)^{n}
1What it means
Unlike simple interest, compound interest earns “interest on interest”. The compound interest itself is CI = A − P. This is the standard annual form (R% per year, n years).
2Variables
| Symbol | Meaning |
|---|---|
| A | Final amount |
| P | Principal |
| R | Rate per annum (%) |
| n | Number of years |
3Worked examples
Example 1 Worked solution
Q. Find the amount on ₹10,000 at 10% per annum for 2 years, compounded annually.
- A = P(1 + R/100)ⁿ = 10000 × (1 + 0.10)².
- = 10000 × 1.21.
✓ A = ₹12,100 (CI = ₹2,100)
4Where it's used
- ✦Savings, fixed deposits and loan growth.
- ✦Comparing investments over time.
5Tips & common mistakes
- !For half-yearly compounding, use R/2 and 2n; for quarterly, R/4 and 4n.
- !CI = A − P; do not forget to subtract the principal.