# Concept of Compound Interest

## Definition

• Compound interest: Compound interest is interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods on a deposit or loan.

## Formula

• Compound Interest= Amount – Principal.

## Notes

### Compound interest:

• Compound interest is interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods on a deposit or loan.
• Compound interest is the interest calculated on the previous year’s amount (A = P + I).
• Calculating Compound Interest:
Step 1: Find the Simple Interest (S.I.) for one year.
Step 2: Then find the amount which will be paid or received. This becomes the principal for the next year.
Step 3: Again find the interest on this sum for another year.
Step 4: Find the amount which has to be paid or received at the end of the second year.

## Example

A sum of Rs. 20,000 is borrowed by Heena for 2 years at an interest of 8% compounded annually. Find the Compound Interest (C.I.) and the amount she has to pay at the end of 2 years.

Let the principal for the first year be P1. Here, P1 = Rs. 20,000.

SI1 = SI at 8% p.a. for 1st year = ₹ (20000 xx 8)/100 = ₹ 1600

Amount at the end of 1st year = P1 + SI1
= Rs. 20000 + Rs. 1600
= Rs. 21600 = P2 (Principal for 2nd year)

SI2 = SI at 8% p.a. for 2nd year = ₹ (21600 xx 8)/100 = ₹ 1728

Amount at the end of 2nd year = P2 + SI2

= Rs. 21600 + Rs. 1728

= Rs. 23328

Total interest given = Rs. 1600 + Rs. 1728 = Rs. 3328.

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Difference between Compound Interest & Simple Interest [00:15:10]
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