Compound Interest

Under compound interest, the interest is not paid to the lender, instead it is added to the principal at the end of time. Then the principal will increase at the end of each time which makes the successive interest higher.

A = \( \scriptsize P \left (1 + \normalsize \frac {R}{100} \right )^ n \)

P is principal

R is rate 

n is time

A is amount

Compound interest = Amount – Principal

Example:

Find the compound interest on #2500 in 6 years at 2% per annum 

Solution

Principal = #2500.00

n = 6yrs

R = 2%

∴A = \( \scriptsize P \left (1 + \normalsize \frac {R}{100} \right ) ^ n \)

= \( \scriptsize 2500 \left (1 + \normalsize \frac {2}{100} \right ) ^ 6 \)

=2500 (1 + 0.02)⁶

=2500 (1.02)⁶

=2500 × 1.1262

= #2815.50k

Compound interest = 2815.50 – 2500

= #315.50k