Understanding the Concepts of Compound Interest
Compound Interest (C.I.) is the calculation of returns for a specific principle amount. In other words, interest will be earned both from the principal and interest collected in previous periods.
A basic understanding of percentage calculations will be very helpful in solving the Compound Interest problems
For Example
Imagine you deposit Rs. 10,000 in a bank at a rate of 10% per annum for two years; we would receive compound interest on the borrowed money for two years.
In the first year, 10% of 10,000 equals 1000; however, in the second year, 10% of the principal is Rs.10,000. Rs. 1000 will be earned.
Plus 10% of the previous interest generated Rs. 1000 for the first year and Rs.1100 for the second year. Equals to the total compound interest of Rs.2100.
Example Problem
Find the compound interest on Rs. 10000 at the rate of 20% per annum for two years.
Step 1: Find 20% of Rs.10000 - which is Rs.2000
Step 2: Add this Interest along with the principal, and now the new principal will be Rs.12000 at the end of two years.
Step 3: Now calculate 20% of the new principal, which is Rs.12000, and the interest for the second year will be 20% of Rs.12000, which is Rs.2400.
Step 4: Add this interest along with the previous capital ⇒ Now, the total amount will be Rs.14400, and subtract the initial principal of Rs. 10,000. We will get Rs.4400 as the compound interest.
This can be represented by a simple formula:
And one more concept to remember is that the sum of principal and interest is called the amount.
Amount = Principal + Compound Interest
CI = Amount - Principal
Applying these concepts alone can solve almost all the problems in Compound interest topics.
FAQsFAQs
Why is understanding the concepts of Compound Interest important?
Understanding the concepts of Compound Interest assists in:
Understanding how Compound Interest formulas are derived
Addressing the Compound Interest problems promptly and accurately.
Resolving each of the various forms of questions on the Compound Interest topic
Developing your unique shortcuts
Is it possible to solve Compound Interest problems without knowing the concept?
Yes, it's possible to solve Compound Interest questions without understanding what they entail. However, experts advise that comprehending the fundamentals is essential to address the problems effectively.
What is the right way to learn Compound Interest concepts?
The foundation of mathematics is concepts, and understanding them is critical to boosting your performance in the Quantitative Aptitude section. Visualising the concepts using real-life examples is the best approach to learn the Compound Interest concepts.
