One way both to find the interest charged in simple and compound interest is

Written by Winona · 54 sec read >

One way both to find the interest charged in simple and compound interest is​


How can I understand the simple interest and compound interest?

Simple and compound interest can be confusing for someone who does not have a clear understanding of the fundamental difference between the two. Let us try to understand them.

Simple interest is calculated every time on the initial principal amount only, for the entire period. Compound interest1, meanwhile, is calculated every time by combining both the principal amount and the previous interest as well.

For example, Simple Interest at the rate of 10% per annum for 5 years on an initial principal of Rs.100 will be Rs.10 per year, and the total amount after 5 years will be Rs.150.

On the other hand, the total amount after 5 years if compounded at the same rate will be around Rs.165. This is because the interest after 1st year will be Rs.10. But the interest after the 2nd year will be calculated on Rs.110 instead of Rs.100 and so on for the rest of the years. This is why the amount will be higher after 5 years if compounded, even for the same principal amount and the same Rate Of Interest.

Simple and Compound Interest formulas:

Simple interest: SI = P × R × T, where P = Principal amount, T = Time period and R = Rate of Interest.

Compound Interest: P (1 + r/n)^(nt) where P=Principal Amount, r = rate of interest, n = number of times the interest will be applied, and t = time period.

Step-by-step explanation:

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