ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -With compound interest, you’re not just earning interest on your principal balance. Even your interest earns interest. Compound interest is when you add the earned interest back into your principal balance, which then earns you even more interest, compounding your returns.

Detailed explanation-2: -If your investment account earns compound interest, then you are earning interest on interest as well as on your investments. Compound interest is undoubtedly the most important concept to understand when building wealth for the long term.

Detailed explanation-3: -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.

Detailed explanation-4: -Compound interest is the interest on a deposit calculated based on both the initial principal and the accumulated interest from previous periods. Or, more simply put, compound interest is interest you earn on interest . You can compound interest on different frequency schedules such as daily, monthly or annually.

Detailed explanation-5: -With interest-on-interest, each interest payment earned is added back to the principal value for which the next interest is calculated. Using our example above, the first interest earned on the 10-year bond is $250. For the second period, interest will then be calculated on the increased value of the bond.