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# Compound interest

digital textbook

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### Compound interest

1. 1. -a digital text book on compound interest
2. 2. Compound Interest Compound interest is interest added to the principal of a deposit or loan so that the added interest also earns interest from then on. This addition of interest to the principal is called compounding. A bank account, for example, may have its interest compounded every year: in this case, an account with \$1000 initial principal and 20% interest per year would have a balance of \$1200 at the end of the first year, \$1440 at the end of the second year, \$1728 at the end of the third year, and so on.
3. 3. Learning objectives  The child understands about Compound interest and the ways to find it
4. 4. Learning Outcomes  The child understands the concept- Compound interest  The child compares the attributes of compound and simple interest  The child applies the knowledge in real life situations  The child develops interest to learn more in mathematics
5. 5. Situation  Ramu has a bank account. He invested Rs 1000 in it. The rate of interest was 60% per annum. After 2 months, he found that the amount in his account was Rs 1102.5. He could not understand the calculation of Rs 2.5. The amount according to his calculation was Rs 1100. He was puzzled
6. 6. Fact  Here the case in Ramu’s account was not miscalculation  The bank account was calculated on basis of compound interest  In compound interest , the interest from the first month is also added to the amount and that amount is taken as principle for calculating next month’s interest  Here , the interest for 1st month was 50 Rs and the principle amount becomes Rs1050. The next month’s interest was calculated for Rs 1050 and the interest got was Rs 52.5
7. 7. Formula  A= P (1+r/n)^nt where P = principal amount (the initial amount you borrow or deposit) r = annual rate of interest (as a decimal) t = number of years the amount is deposited or borrowed for. A = amount of money accumulated after n years, including interest. n = number of times the interest is compounded per year
8. 8. Question  An amount of Rs1,500.00 is deposited in a bank paying an annual interest rate of 24%, compounded quarterly. What is the balance after 6 years?