In our example, in addition to the principle amount of Rs.1000, the earned interest of Rs.75 will also earn interest next year. Putting in simple words, you earn interest not only on the principal amount but also on the interest earned in each compounding period. This increased amount becomes the principal for the next period (called as compounding period) and also earns interest. The bank won’t give the earned interest back to you instead of that, they will add it to your principle amount. In the case of compound interest, the principal in each time of period is different. How much will your deposit be worth in 1 year at an annual interest rate of 7.5%? The answer is Rs.1075, and your earned interest is Rs.75. For example, you put Rs.1000 into a bank account. To understand compounding let just start with simple interest that is calculated only on the principal amount.
Surprised! Let me take you through below article & you will know why compound interest is called as the 8 th wonder of the world. He, who understands it, earns it…he who doesn’t….pays it.” “Compound interest is the eighth wonder of the world.
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