ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -What Is Compound Interest? Compound interest is the interest on savings calculated on both the initial principal and the accumulated interest from previous periods.

Detailed explanation-2: -With compound interest, the interest per period is based on the principal balance plus any outstanding interest already accrued. Interest compounds over time. When calculating compound interest, the number of compounding periods makes a significant difference.

Detailed explanation-3: -Compound interest applies the interest rate to both the principal balance and accrued interest. In other words, it charges interest on interest. With a loan, compound interest can lead to paying more interest over time. For example, a credit card may use daily compounding interest if you’re carrying a balance.

Detailed explanation-4: -It is calculated by multiplying the principal amount by one plus the annual interest rate raised to the number of compound periods, and then minus the reduction in the principal for that year. With compound interest, borrowers must pay interest on the interest as well as the principal.

Detailed explanation-5: -Compound interest is interest calculated on an account’s principal plus any accumulated interest. If you were to deposit $1, 000 into an account with a 2% annual interest rate, you would earn $20 ($1, 000 x . 02) in interest the first year. Assuming the bank compounds interest annually, you would earn $20.40 ($1, 020 x .