How to calculate Compound Interest quickly?
Compound Interest is one of the most important topics in Quantitative Aptitude Section. Questions from this topic are frequently asked in Banking and SSC Examinations.
The value of money is not constant. It changes. When borrowed today, it should be paid tomorrow with an extra charge that is known as INTEREST.
There are two types of interest – Simple Interest and Compound Interest.
Let us now understand the Basic Concepts and Formulas of COMPOUND INTEREST.
When the borrower X and the lender Y agrees to fix up a certain time, for example yearly, half yearly or quarterly to settle the previous money, then the difference between the amount and the money borrowed is said to be the Compound Interest and is denoted by CI.
Compound Interest can also be regarded as:
“INTEREST ON INTEREST”
While calculating Compound Interest you will get to know that Principal for the second unit of time is the Amount of first unit of time and so on.
• When interest is compounded annually,
Where P is the Principal Amount (for which interest is to be paid)
N is the Time (in number of years)
R is the rate of interest
A is the Total Amount after interest
• When interest is compounded half yearly,
• When interest is compounded quarterly,
Difference between Simple Interest and Compound Interest over two years:
Change in Population can also be calculated using the Compound Interest formula. The sign can be positive or negative as the Population increases or decreases.
Where P is the Original Population
R is the Rate of Change in Population
N is the Number of Years
Compound Annual Growth Rate (CAGR):
Where N is the Number of Years
Let us understand the formula of Compound Interest with an example:
Example: What will be the Compound Interest on Rs. 5000 at 5% per annum for 3 years, compounded annually?