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Answer Posted / h.r. sreepada bhagi
There are two concepts - Simple interest and Compound
interest. Simple interest is the interest calculated on the
base amount, where as Compound interest refers to Interest
on the Interest earned in the previous period. It's
illustrated below :
Amount of Fixed Deposit for 3 years receivable on maturity -
Rs. 100000 @10% interest calculated annually.
1st year interest Rs.10000/- Simple Interest.
2nd year interest Rs.11000/- Compound Interest.
3rd year interest Rs.12100/- Compound Interest.
The depositor will get Rs.133100/- at the end of 3 years on
maturity of the deposit. Int eh 2nd & 3rd year interest is
calculated on the previous years interest also & it's called
compounding.
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