Question

Where do we use compound interest?

Answer 1

Compound interest:

Compound interest is the interest that compounds after a particular time period.

It is the interest earned on interest.

The formula for compound interest is $I={\left(1+\frac{r}{n}\right)}^{nt}$, where $r$is the rate of interest in $\%,n$is the number of times interest is applied per time period, $t$is the number of time periods elapsed.

Compound interest is used by banks when money is deposited and also for loans such as personal loans and mortgages.

For example, If the savings account gives an interest of $5\%$per annum and the interest is compounded annually. If the initial deposit amount is $\$1000,$the interest in the first year will be $\$50.$ For the next year, the interest is calculated on the final amount i.e., $\$1050$ and so on.

The longer the investment, the higher the interest.