ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Compounding is when the returns earned from an investment are reinvested to generate additional earnings over time. In short, compounding is Interest on Interest, hence magnifying the returns over time.

Detailed explanation-2: -Interest-on-interest, also referred to as ‘compound interest’, is the interest that is earned when interest payments are reinvested.

Detailed explanation-3: -Compound interest makes your money grow faster because interest is calculated on the accumulated interest over time as well as on your original principal. Compounding can create a snowball effect, as the original investments plus the income earned from those investments grow together.

Detailed explanation-4: -Compound interest is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest.

Detailed explanation-5: -Compound interest, can be calculated using the formula FV = P*(1+R/N)^(N*T), where FV is the future value of the loan or investment, P is the initial principal amount, R is the annual interest rate, N represents the number of times interest is compounded per year, and T represents time in years.