Compound Interest Concept & Shortcut Methods
In compound interest, the interest for each period is added to the principle before interest is calculated for the next period. With this method the principle grows as the interest is added to it. This method is mostly used in investments such as savings account and bonds.
To understand compound interest clearly, let’s take an example.
1000 is borrowed for three years at 10% compound interest. What is the total amount after three years?
Year

Principle

Interest (10%)

Amount

1st

1000

100

1100

2nd

1100

110

1210

3rd

1210

121

1331

Difference between Simple Interest and compound interest
After three years,
In simple interest, the total amount would be 1300
And in compound interest, the total amount would be 1331.
After three years,
In simple interest, the total amount would be 1300
And in compound interest, the total amount would be 1331.
Some Basic Formulas
If A = Amount
P = Principle
C.I. = Compound Interest
T = Time in years
R = Interest Rate Per Year
If A = Amount
P = Principle
C.I. = Compound Interest
T = Time in years
R = Interest Rate Per Year
See Example
Rule 2:
If principle = P, Rate = R% and Time = T years then
If principle = P, Rate = R% and Time = T years then
 If the interest is compounded annually:
 If the interest is compounded half yearly (two times in year):
 If the interest is compounded quarterly (four times in year):
Example
Find the total amount on 1000 after 2 years at the rate of 4% if
 The interest is compounded annually
 The interest is compounded half yearly
 The interest is compounded quarterly.
Sol:
Here P = 1000
R = 4%
T = 2 years
If the interest is compounded annually
R = 4%
T = 2 years
If the interest is compounded annually
(From the table given at the bottom of the page)
Rule 3: If difference between Simple Interest and Compound Interest is given.
Example
Example
Example