What is the compound interest on Rs 20000 for 2 years at compounded yearly at the rate of 1 paisa per rupee per month?

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Use a calculator to know how much compound interest you will earn out of your investment, like a Fixed Deposit (FD) for example, if you are planning to apply for a term deposit. A compound interest calculator is a tool through which compound interest can be calculated online. Compound interest calculation can be done for different tenures and interest payout frequencies such as daily, monthly, quarterly, half-yearly or yearly. Understand the power of compound interest and see how it will help grow your investment by using an online compound interest calculator. In this write up we explore more about what is compound interest, how it benefits an investor, how you can use a compound interest calculator and much more. Read on further for more details.

What is Compound Interest?

Compound interest, also known as compounding interest, is accumulated interest that is added to the principal amount invested to calculate the interest on a deposit. In simple words, compound interest is the ‘interest earned on interest’. This simply means that compound interest is earned on the principal plus the interest earned. The principal basically increases every year or depending on how frequently compound interest is calculated .

Let us look at an example to better understand the concept of compound better:

• Suppose you make an investment of Rs.50,000 in a fixed deposit for 5 years at 10%, the interest earned for the first year will be Rs.5000.
• However, for the second year, the principal will not be Rs.50,000, but the accumulated interest amount, plus the principal. This means that the principal will be Rs.50,000 + Rs.5000 = 55,000.
• Second year principal = Previous year’s principal + Interest earned, which is Rs.50,000 + Rs.5,000 = Rs.55,000. It is clearly seen here that the interest is added back to the principal amount to calculate interest for the following years. This is nothing but compounding.

The below table illustrates how interest is earned when the interest is compounded.

Compound interest calculation: Daily, monthly, quarterly, half-yearly, yearly

A compound interest calculator allows an investor to know how much interest he/she will earn for different interest computation frequencies. This may be on a daily, monthly, quarterly, half-yearly, or yearly basis. The interest compounding frequency makes a difference in the total interest that is earned on any type of deposit. To understand this better, let us take a look at an example:

• For example, if you invest Rs.10,000 on an FD in ICICI Bank for a period of 1 year at the rate of 6.60%, the total interest earned in case of monthly compounding will be Rs.656.
• On the other hand, if the interest is compounded on a quarterly basis, for the same principal amount for the same tenure and interest rate, the total interest earned will be Rs.660.
• Again, if the interest is compounded on a yearly basis, keeping all the other parameters same, the aggregate interest earned will be Rs.677.

Refer to the below table to understand how different interest compounding frequencies affect interest rate:

Compounding Frequencies

• Daily
• Monthly
• Quarterly
• Half-yearly
• Yearly

How to Calculate Compound Interest?

Compound interest can be calculated using various online tools like a compound interest calculator for example. To do this calculation you need the following information:

• Principal amount
• Tenure of investment
• Interest rate

You can use the BankBazaar compound interest calculator to know the total interest that will earned on a particular investment. All you need to do is to choose the investment amount, the interest rate and the time period for which you are putting in your money.

Compound Interest Formula

The compound interest formula is: A = P (1 + r/n) ^ nt

• V = Future value of investment
• P = Principal
• r = Interest rate
• n= Interest compounding frequency
• t = Tenure of the investment

What is Compound Interest Calculator?

A compound interest calculator is a tool that is used to calculate the total interest that will be earned on an investment. This tool is very convenient and easy to use and gives consumers the actual rate of return on an investment. This will help any prospective investor see how compound interest will grow their money. The tool is also advantageous because an investor can make a decision on how much he/she has to invest in order to reach a financial/investment goal. There are a number of benefits of using a compound interest calculator, let us understand some of them.

Benefits of compound interest calculator:

• Easy to use
• Helps investors decide how much they should invest to get a certain return
• Saves time
• Accurate and user-friendly

If you want to estimate the exact yield of your investment for a particular tenure, use the BankBazaar online compound interest calculator. The calculator is customized to cater to all types of investors. So, any amount can be selected along with the tenure and interest rate.

Compound Interest vs Simple Interest

So what is the difference between compound interest and simple interest? When it comes to simple interest, a certain fixed percentage of interest is paid for a certain tenure. Here the principal remains the same each year. However, in the case of compound interest the principal keeps increasing because the interest earned is added back to the principal. Let us take a look at the differences:

• The growth rate is lesser in the case of simple interest and it is much higher for compound interest
• Compound interest is more beneficial for an investor than simple interest because the investor will enjoy the power of compounding. So the bottom line is that compound interest helps your money grow at a faster pace
• Compound interest is always higher than simple interest
• Compound interest helps a customer mitigate the cost of inflation and preserve the value of money. This is not the case with simple interest.
• The principal on which the interest is computed remains the same when it comes to simple interest. In case of compound interest, the principal changes each time interest is compounded because the interest earned is added to the principal amount

Let us understand more about the differences between simple and compound interest by using a comparison table below:

Advantages and features about compound interest that you must know

• Compound interest can double your money: The best part about compound interest is that it will literally help you double your money. To know how long it will take for you to double your investment, all you need to do is divide the interest rate by 72. For this rule to work the interest rate should be less than 20%.
• The longer the investment, the better: To really reap the benefits of the power of compounding, start making investments as early as possible. The earlier in life you put in money the more you will gain out of compound interest.
• Compounding frequencies make a difference: The shorter the interest compounding frequency, the more you will earn out of the investment. For example, instead of compounding annually, if the interest is compounding quarterly, the rate of return will be comparatively much higher.

FAQs on Compound Interest Calculator

1. What is future value of an investment?

   Future value is nothing but the total value of an investment after the said maturity period.

2. What is compounding interval or frequency?

   Compounding interval or frequency refers to the time interval during when compound interest is calculated.

3. When is interest usually compounded?

   This depends from investment to investment. It is different for savings account, term deposits and other types of investments. For example, in a fixed deposit, an investor can choose different interest compounding frequencies such as monthly, quarterly, half-yearly or annually.

   Effective annual rate is the total return that you will earn from an investment. This yield will be higher than the interest rate because of the power of compounding interest.

4. How will I know if I am earning compound interest on my investment?

   Contact your bank or financial institution through which you are making an investment.