In this chapter, we shall discuss the concept of compound interest and the method of calculating the compound interest and the amount at the end of a particular period. And you will also study the application of compound interest in practical life.
Let's have a quick recall of the basics we have already studied.
Interest is the amount of money that is paid for the use of borrowed money.
Let a person '\(A\)' borrows some money from '\(B\)' for a certain period of fixed time at a fixed rate, then '\(A\)' will pay the borrowed money along with the additional money, which is called interest.
Basic terms
The money borrowed or lend out for a certain period is called the "principal" or the "sum".
AmountAmount \(=\) Principal \(+\) Interest
The duration of the period for which the money is borrowed is called the time.
Rate of Interest per Annum
If interest is payable yearly for every \(100\) rupees, then it is called rate of interest per annum.
Compound Interest:
Sometimes it so happens that the borrower and the lender agree to fix up a certain unit of time, say yearly or half-yearly or quarterly, to settle the previous account.
In such cases, the amount after the first unit of time becomes the principal for the second unit, the amount after the second unit becomes the principal for the third unit and so on.
After the specified period, the difference between the amount and the money borrowed is called the compound interest for the period, which is abbreviated as \(C.I\).
Compound Interest \((C.I.)\) \(=\) Amount \(A\) \(-\) Principal \(P\)