Question 1

What is compound interest?

Accepted Answer

Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods. It is colloquially described as 'interest on interest'.

Question 2

What is the compound interest formula?

Accepted Answer

The compound interest formula is: A = P(1 + r/n)^(n*t). Where A is maturity amount, P is principal, r is annual interest rate, n is compounding frequency per year, and t is tenure in years.

Question 3

What is the difference between simple and compound interest?

Accepted Answer

Simple interest is calculated only on the initial principal amount. Compound interest is calculated on the principal plus whatever interest has already been credited, which causes the investment to grow at an accelerating rate over time.

Question 4

How does compounding frequency affect my returns?

Accepted Answer

The more frequently interest is compounded, the higher the returns will be. For example, quarterly compounding yields a slightly higher maturity amount than annual compounding because interest starts earning additional interest sooner.

Question 5

Where is compound interest commonly used in India?

Accepted Answer

In India, compound interest is standard for bank Fixed Deposits (usually quarterly compounding), PPF (annual compounding), Mutual Funds (continuous reinvestment), and most retail loans like home loans and personal loans.

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Compound Interest vs Simple Interest Growth