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Compound Interest Formula and Examples

The document explains the compound interest formula, A = P * (1 + r/n)^(nt), where A is the total amount, P is the principal, r is the annual interest rate, n is the number of compounding periods per year, and t is the time in years. It provides two examples: one for annual compounding resulting in a compound interest of INR 1,576.25 on INR 10,000 at 5% for 3 years, and another for quarterly compounding yielding INR 1,373.27 on INR 8,000 at 8% for 2 years. The document illustrates how to calculate both the total amount and the compound interest.

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18 views2 pages

Compound Interest Formula and Examples

The document explains the compound interest formula, A = P * (1 + r/n)^(nt), where A is the total amount, P is the principal, r is the annual interest rate, n is the number of compounding periods per year, and t is the time in years. It provides two examples: one for annual compounding resulting in a compound interest of INR 1,576.25 on INR 10,000 at 5% for 3 years, and another for quarterly compounding yielding INR 1,373.27 on INR 8,000 at 8% for 2 years. The document illustrates how to calculate both the total amount and the compound interest.

Uploaded by

lavy10668
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Compound Interest Formula and Examples

Compound Interest Formula

The compound interest (CI) on a principal P after n years at an annual rate of interest r (in decimal

form) is calculated as:

A = P * (1 + r/n)^(nt)

Where:

- A = Total amount after t years

- P = Principal amount

- r = Annual interest rate (in decimal, i.e., divide the percentage by 100)

- n = Number of times interest is compounded per year

- t = Time in years

Compound Interest (CI) is then:

CI = A - P

Examples

Example 1: Annual Compounding

Problem: Find the compound interest on INR 10,000 for 3 years at an annual interest rate of 5%.

Solution:

Here, P = 10,000, r = 5/100 = 0.05, n = 1 (compounded annually), t = 3


A = P * (1 + r/n)^(nt)

= 10,000 * (1 + 0.05)^3

= 10,000 * (1.05)^3 = 10,000 * 1.157625 = 11,576.25

CI = A - P = 11,576.25 - 10,000 = 1,576.25

Answer: Compound Interest = INR 1,576.25

Example 2: Quarterly Compounding

Problem: Find the compound interest on INR 8,000 for 2 years at 8% per annum, compounded

quarterly.

Solution:

Here, P = 8,000, r = 8/100 = 0.08, n = 4 (compounded quarterly), t = 2

A = P * (1 + r/n)^(nt)

= 8,000 * (1 + 0.08/4)^(4*2)

= 8,000 * (1 + 0.02)^8

= 8,000 * (1.02)^8 = 8,000 * 1.171659 = 9,373.27

CI = A - P = 9,373.27 - 8,000 = 1,373.27

Answer: Compound Interest = INR 1,373.27

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