Compound Interest is Deposit or a Loan that is calculated based on both the initial principal amount and the accumulated interest from the previous period

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## Compound interest

Do you know why Compound interest is an exponential growth to your investment over a long period of time? Here is how a simple interest vs Compound interest projects the growth of your investment over a long period time.

## Compound Interest Formula with out Recurring Deposits

Where

P = Initial Deposit

*r* = Annual Interest rate

*n* = Compound interest deposition frequency

(Monthly = 12, Quarterly = 4, Half yearly = 2, Annually = 1, daily = 365)

*t *= time period in years

## Compound Interest Formula with Recurring Deposits

Where

P = Initial Deposit

Q = Monthly reccuring deposit

*r* = Annual Interest rate

*n* = Compound interest deposition frequency

(Monthly = 12, Quarterly = 4, Half yearly = 2, Annually = 1, daily = 365)

*t *= time period in years

### Example of Compound interest calculation

**Ms.Vaahini would like to deposit an initial amount of ₹100,000 rupees that matures in 5 years. Each month, she would like to invest ₹1000 for the entire 5 years. The interest rate is 5% annually. She wants to calculate how much she will save in total in those five years if the compound interest deposits monthly.**

P = ₹100,000

Q = ₹1000*r* = 5% = 0.05*n* = 12*t* = 5

A = **[**100000x(1+(0.05/12))^(5×12)**]** + **[**(12/12) x (1000)x(((1+(0.05/12))^(5×12))-1)/(0.05/12)**]**

A = **[**100000x(1.28335868)**]** + **[**(1 x 1000x(68.00608284)**]**

A = **[**128335.86**]** + **[**68006.08**]**

A = 196,341.88

Vahini will have ₹196342 at the end of 5 years of tenure.

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## Simple Interest Formula

Simple Interest (I) = P x R x n

Where:

P = Deposited Amount

R = Interest Rate

n = Simple interest deposition frequency

(Monthly = 12, Quarterly = 4, Half yearly = 2, Annually = 1)

### Example of Simple Interest Calculation

**Ms.Vaahini would like to deposit an amount of ₹100,000 rupees that matures in five months. The interest rate is 5% annually. She wants to calculate how much interest she will earn in those five months.**

**I = P x R x n**

I = ₹100,000 x 5%/year x 5/12 of a year

I = ₹2083

Vaahini earns ₹2083 for the five months.

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