A Guide to Compound Interest and its basics

Published On March 5, 2019 | By William Thomas | Business

When you enter in the financial word,there are many financial terms that you have to go through. You might have learned them in school or colleges, but as it is a said that implementation starts in the professional life.When you are in school you are just getting the knowledge of technical terms but you will understand that better in your professional life. Now, here is a guide on compound interest that can make you understand well.

What is Interest?

Suppose you submit $1000 to the bank at an interest rate of 10% for a year then bank will return an amount of $1100 at the end of year. The money $100 is an interest amount that you get on your money

Simple Interest

The way of calculating the interest is known as simple interest. Interest is calculated on some rate with the amount of time it is given for. The rate of interest, time taken and principle amount is multiplied to calculate the interest. Hence, there is a formula: Principal*Time*Rate/100

Compound Interest

Compound interest is the growth in the money that is returnedwith interest.It is the interest calculated on the previous interest.It is generally calculated in financial transaction of business.For example: if you submit $1000 to the bank account where you get an interest at 10% rate, after one year if no money is transacted you will get anamount of $1100 that means $100 is the interest money that the bank pays you, another year you will get an interest of 10% on the previous amount that is $1100 or $100. And the bank will pay you $1210.Therefore,compound interest is the interest calculated on interest value. It is calculated yearly, half yearly or quarterly.

The interest rate are not such simple as mentioned in example, it is always advised to hire some professional financial advisor to direct you the pros and cons of investing your money.

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