Significance of Compound Interest and Simple Interest
In mathematics, we have learned a huge number of concepts that are directly or indirectly related to our daily lives. Whether we have studied numbers, shapes, measurements, arithmetic operations, etc., each concept has its own significance in real life and in various fields such as engineering, medical, banking, etc.
The most common concept we deal with is the calculation related to the currencies, such as saving and investing and getting the interest in the principal amount. Interest is characterized as the expense of getting cash on account of revenue charged on a credit balance. Alternatively, interest can likewise be the rate paid for cash on the store as on account of authentication of the store. So basically there are two types of interest: Simple interest and Compound interest.
The method of calculating interest for a principal or loan amount is known as simple interest. Whenever we lent money to the bank or deposited some principal amount, then the bank impose some interest at a rate annually. Even if we borrow any amount from the bank, then they need to return or repay the loan amount along with interest. The simple interest formula is given by:
SI = (P x R x T)/100
Where P is the principal amount (in Rs.), R is the rate of interest (in %) and T is the time period (in years).
With simple interest credits, the loan specialist applies the installment to the month’s advantage first; the rest of the installment decreases the head. Every month, the borrower cover the premium with the goal that it never builds. In the event that she pays her credit late, she’ll need to pay more cash to cover the extra premium and keep the advance’s predefined result date. This differentiations with self multiplying dividends, which adds a part of the old interest to the advance. The loan specialist at that point computes new interest on the old interest owed by the borrower.
Compound interest is the sum of interest on principal amount and interest added to the previous period. Hence, it is said to be interest compounded annually. Compound interest is the expansion important to the chief amount of a credit or store, or all in all, interest on interest. It is the consequence of reinvesting premium, instead of paying it out, so that premium in the following time frame is then acquired on the chief entirely in addition to recently collected revenue.
Compound interest = Amount – Principal
Amount = P(1+r/n)nt
R= rate of interest
n= number of times the interest is compounded yearly
Some of the major applications of compound interest are seen in increase and decrease of population, growth of bacteria and rise or depletion of population, etc.
As we have learned about simple and compound interest in this article, thus we can conclude that both are very important in our day to day life.
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