Answer & Explanation
B) more quickly than simple interest
Compounding interest means interest accrues on the interest charged and the principal amount each period the interest is charged.
Compound interest is calculated by multiplying the principal amount by one plus the annual interest rate raised to the number of compound periods minus one.The total initial amount of the loan is then subtracted from the resulting value.
The formula for calculating compound interest is:
[P (1 + i)n] – P
= P [(1 + i)n – 1]
(Where P = Principal, i = nominal annual interest rate in percentage terms, and n = number of compounding periods.)
Take a three-year loan of Rs. 10,000 at an interest rate of 5% that compounds annually. What would be the amount of interest? In this case, it would be:
Rs. 10,000 [(1 + 0.05)3] – 1
= 10,000 [1.157625 – 1]
= Rs. 1,576.25.
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