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Problem Set 1 : Compound Interest Video Lecture | General Aptitude for GATE - Mechanical Engineering

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FAQs on Problem Set 1 : Compound Interest Video Lecture - General Aptitude for GATE - Mechanical Engineering

1. What is compound interest?
Ans. Compound interest is the interest that is calculated on the initial principal amount as well as the accumulated interest from previous periods. It is different from simple interest, as it takes into account the compounding of interest over time.
2. How is compound interest calculated?
Ans. Compound interest is calculated using the formula A = P(1 + r/n)^(nt), where A is the future value of the investment or loan, P is the principal amount, r is the annual interest rate, n is the number of times that interest is compounded per year, and t is the number of years.
3. What are the advantages of compound interest?
Ans. Compound interest offers several advantages. Firstly, it allows your investments or savings to grow exponentially over time. Secondly, it can help you build wealth faster as the interest is added to the principal amount, resulting in a higher base for future interest calculations. Lastly, compound interest can be particularly beneficial for long-term investments, as the compounding effect becomes more significant over time.
4. How does compound interest affect loans?
Ans. Compound interest affects loans by increasing the total amount to be repaid. As interest is added to the principal amount, the outstanding balance grows over time. This means that borrowers end up paying more than the initial borrowed amount. It is important to consider the interest rate and compounding frequency when taking out a loan to understand the total repayment amount.
5. Can compound interest work against you?
Ans. Yes, compound interest can work against you if you have debt or loans. If you fail to make regular payments or accumulate interest on credit card balances, the compounding effect can significantly increase the total amount owed. This can lead to a cycle of debt, making it difficult to repay the accumulated interest and the principal amount. It is crucial to manage debt effectively to avoid the negative impact of compound interest.
201 videos|166 docs|152 tests

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