What is Compound Interest ?
“Compound interest is the eighth wonder of the world.
He who understands it earns it… he who doesn’t… pays it.” - Albert Einstein.
Compound Interest is the addition of Interest to the principal sum of a loan or deposits.
It can also be said, it is the interest on Interest.
Accumulated interest is added to the Principal amount. And each year when Compound Interest is calculated.
It is calculated on the sum total of initial Principal amount and accumulated interest from previous years.
Compound Interest is standard in finance and economies. There is exponential growth in compounding effect.
The formula is given below:
And the Amount formula is,
where, P = Principal , r = Rate of Interest , t = Time Period , n = Compounding frequency
What is Compounding Frequency ?
The Compounding frequency is the number of times per year (or rarely, Another unit of time).
the accumulated interest is paid out, or capitalized (credited to the account), on a regular basis.
The frequency could be yearly, half-yearly, Quarterly, Monthly, Weekly, Daily or Continuous (or not at all, unitil maturity).