There are two methods to calculate the interest amount. These methods are simple interest and compound interest. The interest rate can be the nominal interest rate, annual percentage yield, or effective interest rate. The nominal interest does not consider the interval while calculating the interest rates, while in the effective interest, the compounding is done after certain intervals. This compounding can be calculated for a month, quarter, year, or 2 years. In general, the compounding is done weekly. Let us try to understand in detail how compound interest is calculated mathematically as well as in excel.
What is compound interest?
Compound interest, also called compounding interest, means the accumulated interest, which is calculated for the principal amount and interest on the deposit amount. In other words, it can be said as an interest in interest. Therefore, with compound interest on the same amount, the investment companies get interest on both the initial amount and the interest incurred on the previous period. The compound interest generally increases every year. As an example, suppose you have deposited Rs. 50 for 2 years with the 10% compound interest. For the first year, you will get the amount Rs. 5 (=50*0.10), and for the