# What Do You Mean by Compound Interest?

Interest is something that is paid on an extra basis on the loan amount. Thus, Compound Interest is the interest factor that is being calculated in compounded form over a period of time. More definitely, we can say that compound interest is the interest that is paid on the loan sum which is estimated over the principal amount which is being incurred initially, and the interest which is accumulated from the previous periods.

## Origin of The Compound Interest

The Compound Interest or the compounding factor of interest amount study first originated in the 17th century in Italy. This concept is rightly known as the ‘interest on interest’. This method is used to make the sum grow faster than the simple interest which we have learned in junior classes. The simple interest in being calculated only on the principal amount whereas the compound interest is calculated on the principal as well as compounded interest amount.

## The Rate of Compound Interest

The rate of compound interest always relies on the frequency of its compounding sum. That is higher the number of the compounding periods, the higher be the compound interest.

This interest-on-interest method gives the effect of increasingly positive returns which is based on the initial principal amount, this is compounding in nature and thus also known as the magic of compound interest.

## How Would You Define Compound Interest?

Compound interest is the interest that is being calculated on the principal amount and the interest value which is being accumulated over the previous time span. As studied, this is in contrast with the simple interest concept, here the interest is not added to the principal amount which is being calculated over the years. In maths, compound interest is denoted by its abbreviated term as ‘CI’.

## Usage of Compound Interest

The method of compound interest is used in many financial transactions. This is priorly used in the banks and other financial sectors. Thus, let us find out the application of compound interest, which are as follows:

• In order to find out the increase or decrease in the population
• The growth in bacteria
• The rise or the depreciation of the value in any particular item

## Compound Interest in Mathematical Studies

In the study of maths, compound interest can be estimated to calculate the interest in various scenarios. Thus, in order to calculate the compound interest, we first should know the amount and the principal sum, after which the calculation will be lucid.

## What is the Formula for Compound Interest?

The formula for compound interest is:

Compound Interest = Amount – Principal Sum

This formula signifies that CI is based on the initial principal amount and the interest which is being collected in a span of time.

## Does a Compound Interest Grow?

Definitely! Compound interest grows at an ever-escalating rate. This happens because the compound interest consists of the interest which is been accumulated over the past periods. Suppose in a five years span, the interest amount will never be the same for all five years. On the other hand, if it was SI (Simple Interest) then the interest amount would be the same for five years straight.

## Math Classes – Cuemath

Cuemath provides a range of exciting maths classes for the students to endeavor in the learning platform. Maths classes become a necessity for the students to understand the concepts of maths in a clearer version. Thus, Cuemath provides an exclusive experience to students to find interest in math if taught and guided properly.

In this study, we have learned the basics of compound interest. We now understand the difference between simple interest and compound interest and also their differing formulae.

You can visit Cuemath for a more in-depth understanding of the same and also practice a range of sums based on the concept.

### Related Articles

Check Also
Close 