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?
You can understand the process of compound interest by image shown below.
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.
In simple interest, the total amount would be 1300
And in compound interest, the total amount would be 1331.
Basic Formulas of Compound Interest
If A = Amount
P = Principle
C.I. = Compound Interest
T = Time in years
R = Interest Rate Per Year
P = Principle
C.I. = Compound Interest
T = Time in years
R = Interest Rate Per Year
Shortcut Formulas for Compound Interest
Rule 1: If rate of interest is R1% for first year, R2% for second year and R3% for third year, then
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
Rule 3: If difference between Simple Interest and Compound Interest is given.
 If the difference between Simple Interest and Compound Interest on a certain sum of money for 2 years at R% rate is given then
Example
 If the difference between Simple Interest and Compound Interest on a certain sum of money for 3 years at R% is given then
Example
Rule 4: If sum A becomes B in T1 years at compound interest, then after T2 years
Example
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