ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -A compound interest account pays interest on both your initial investment plus any interest previously accrued. This interest-upon-interest appreciation is the “compounding” factor that grows with time. Simple interest accounts, on the other hand, only pay interest on the original principal.

Detailed explanation-2: -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.

Detailed explanation-3: -Simple interest is calculated on the principal, or original, amount of a loan. Compound interest is calculated on the principal amount and the accumulated interest of previous periods, and thus can be regarded as “interest on interest.”

Detailed explanation-4: -Compound interest is the interest you earn on interest. This can be illustrated by using basic math: if you have $100 and it earns 5% interest each year, you’ll have $105 at the end of the first year. At the end of the second year, you’ll have $110.25.