![]() ![]() The compound interest on a principal P for two years = (Simple interest on P for two years) + (Simple interest for one year on the simple interest on P for one year) + (Simple interest for one year on the simple interest on P for one year).Ĭlearly, (i) The compound interest on a principal P for two years > The simple interest on the same principal for two years. When P = principal, I = simple interest for one year on PĪnd I’ = simple interest for one year on (P + I). Thus, the amount with compound interest on a principal P for a period of two years It could be six months, one-fourth of a year, and so on. Note that it is not necessary for the specified time to be one year. In such a situation, the interest is called compound interest. ![]() ![]() The simple interest is then calculated on the new principal for the next year. The simple interest is then calculated on the new principal for the next year of borrowing. Many lenders such as banks add the simple interest payable at the end of a specified time such as one year to the principal if the period of borrowing is more than one year, and treat this cumulative amount as the new principal for the next year of borrowing. ![]()
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