How to Calculate Compound Interest — Derivation, and Example with Solutions

In previous lessons, we had already discussed basic interests. The rate is multiplied by the principal and the time to quantify basic interest.

Let’s take a look at the definition of compound interest calculator. When we conclude the interest is multiplied, we’re referring to the fact that it is measured more than once a year.

Compound interest is interest based on both the principal sum and the interest received. As the interest owed is applied to the principal for each time span, the value of the principal increases.

The formula of Compound Interest

The example discussed above tells about how to calculate compound interest. There is a formula for calculating compound interest as well.

Examples of Compound Interest

Let us see some examples of compound interest in order to understand how to calculate compound interest.

Find the compound interest when the principal is Rs 2000, the rate is 7% per annum compounded annually and time is 3 years.

Here, principal (P) = ₹2000, rate (R) = 7%, time (n) = 3 years

To calculate the compound interest, we will use the compound interest formula.

Amount (A) = P [1 + (R/100)]n

= 2000 [1 + (7/100)]3

= 2000 × [107/100]3

= 2000 × (107/100) × (107/100) × (107/100)

= 2450.086

Compound Interest (CI) = A — P

= ₹2450.086 — ₹2000

= ₹450.086

The compound interest solutions are used in many real-life scenarios. Some of these are:

1. To find the increase or the decrease in population.
2. To find the change in the price of an item (increase or decrease).
3. To find the growth of bacteria if the rate of growth is known.