Interest is the amount which is charged as compensation of lent assets or money. One of the types of Interest is Compound Interest. Compound interest is simply defined as the interest on interest. In other words we can say that when someone borrows money or assets for a fixed time then he has to pay compensation for this money. If he does not pay in fix time then he has to compensate for unpaid principle in addition to previous interest.
If someone deposits his assets or money in the bank then bank will pay some money for this amount. Borrowed assets are called as principal amount. Compensation on principal amount may be taken monthly or yearly.
If someone is lending money on the scheme in which interest is to be paid monthly then at the end of the month he has to pay the interest at fixed interest rate for whole principal amount. If interest is not paid at the end of the month, then after next month interest has to in compounded form which is also called as exponential form since net amount increases exponentially. In other words interest will be paid on principle amount plus interest of past month or months.
Lets try to understand how to find compound interest formula.
Basic formula to calculate compound interest is shown below:
Future value = Principal amount * (1 + rate) total time
Mathematically, F = M * (1 + R) n and C.I. = F – P.
Where 'F' denotes future amount. Future amount is that amount which has to pay after completion of fix time. 'n' is the total time for which money or assets are lent.
'M' denotes money or assets that are borrowed. 'R' is the interest rate or periodic rate which defines the rate at which a lender takes the compensation on principle amount.