The compound interest on ₹10,000 at an 8% annual rate for 2 years is ₹1,664.
Compound interest is the interest calculated on the initial principal and also on the accumulated interest from previous periods. It allows your investment to grow faster over time, as the interest earned itself starts earning interest.
Understanding the Calculation
To determine the compound interest, we first need to find the total amount accumulated after 2 years. Based on the given parameters, the principal amount (P) is ₹10,000, the annual interest rate (R) is 8%, and the time period (n) is 2 years. When compounded annually, the amount (A) accumulated can be calculated using the formula:
A = P * (1 + R/100)^n
However, for this specific problem, we already know the final amount after 2 years at an 8% annual rate, which is ₹11,664.
Once the total amount is known, the compound interest (CI) is simply the difference between the final amount and the initial principal.
CI = Amount (A) - Principal (P)
Let's break down the values:
| Parameter | Value |
|---|---|
| Principal (P) | ₹10,000 |
| Annual Rate (R) | 8% |
| Time (n) | 2 Years |
| Final Amount (A) | ₹11,664 |
Now, calculate the compound interest:
CI = ₹11,664 - ₹10,000
CI = ₹1,664
Practical Implications of Compound Interest
- Growth Potential: Compound interest is often referred to as the "eighth wonder of the world" due to its ability to significantly increase wealth over time, especially over longer periods.
- Investing: It's a fundamental concept in investments, where earnings from stocks, bonds, or savings accounts can compound, leading to exponential growth.
- Loans: Conversely, compound interest also applies to debts like credit cards and loans, where unpaid interest adds to the principal, increasing the total amount owed.
Understanding how compound interest works is crucial for effective personal finance management, whether you are saving, investing, or borrowing.
