Compound Interest (CI)
Compound Interest is interest on interest. It is costly for the borrowers but good for savings or investment purposes. The principle varies during the entire period. The formula for calculating compound interest = Principal (1+ rate)Time -1. For the same scenario as above, the Compound Interest will be 10000[(1+5%)3 -1] = 1576.25. which is more than SI. Any type of investment made is subjected to CI.
What is Interest in Finance? – Definition, Calculation, Examples
The word interest is used in everyday life, by the way, the meaning of interest is to be curious about something. But ‘Interest’ in finance means something else. Come let us know about your interest by taking our curiosity together.
When we keep our money in the bank, the amount goes increases after some time by some percentage, but how this amount has been increased, who deposited more money in the account? This might be the question that may arise in your mind. Here comes the role of interest. The increase in money is due to the rate of interest offered by the bank. This is typically expressed in the Annual Percentage Rate (APR).
Let's explore some of the common terms that may help us understand the interest further.
Principal, the amount given to the borrower by the lender is called the principal amount. In this case, the amount deposited by you (lender) to the bank (borrower). Time, for how much time the money is lent to the borrower. In the above case, for how much time amount is deposited in the bank(borrower) by you (lender).