Understanding Compound Interest
To calculate the compound interest on an amount, we use the formula:
A = P(1 + r/n)^(nt)
Where:
- A = the future value of the investment/loan, including interest
- P = the principal investment amount (initial deposit or loan amount)
- r = annual interest rate (decimal)
- n = number of times that interest is compounded per year
- t = the number of years the money is invested or borrowed.
In this scenario:
- P = 1562.5
- r = 8/100 = 0.08
- n = 1 (since the interest is compounded annually)
- t = 2 years
Calculating the Amount
Using the formula:
A = 1562.5(1 + 0.08/1)^(1*2)
- First, calculate (1 + 0.08) = 1.08
- Next, raise it to the power of 2: 1.08^2 = 1.1664
- Now, multiply by the principal: A = 1562.5 * 1.1664 = 1820.30
Calculating Compound Interest
Now, to find the compound interest (CI):
CI = A - P
- CI = 1820.30 - 1562.5
- CI = 257.80
Final Result
- The compound interest on Rs. 1562.5 for 2 years at 8% compounded annually is Rs. 257.80.
This calculation illustrates how compound interest grows over time, making it a powerful investment tool.