ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -How Compound Interest Works. Compound interest is calculated by multiplying the initial principal amount by one plus the annual interest rate raised to the number of compound periods minus one.

Detailed explanation-2: -The formula for calculating compound interest is P = C (1 + r/n)nt – where ‘C’ is the initial deposit, ‘r’ is the interest rate, ‘n’ is how frequently interest is paid, ‘t’ is how many years the money is invested and ‘P’ is the final value of your savings.

Detailed explanation-3: -Solution: We use the present value formula, where A is $20, 000, r is 6% or 0.06, n is 12, and t is 5 years. Approximately $14, 827.45 should be invested today in order to accumulate to $20, 000 in five years.

Detailed explanation-4: -For example, if you deposit $1, 000 in an account that pays 1 percent annual interest, you’d earn $10 in interest after a year. Thanks to compound interest, in Year Two you’d earn 1 percent on $1, 010-the principal plus the interest, or $10.10 in interest payouts for the year.