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CBSE - VIII

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Simple and Compound Interest

Interest is the extra money that a bank gives you for saving or depositing your money with them. Similarly, when you borrow money, you pay interest.

With **Simple interest**, the interest is calculated on the same amount of money in each time period, and, therefore, the interest t earned in each **time period** is the same.

On the other hand, **compound interest** is calculated on the **principal **plus the **interest** for the previous period. The **principal amount ** increases with every **time period**, as the **interest** payable is added to the **principal**. This means interest is not only earned on the **principal**, but also on the **interest** of the previous time periods.

So we can say that the **compound interest** calculated is more than the **simple interest** on the same amount of money deposited.

When **interest** is compounded, the total amount is calculated using the formula, .** **

** **

**Interest** is generally calculated on a yearly basis. Sometimes, it can be compounded more than once within a year. It can be **compounded half yearly**, which means twice a year, or quarterly, which means four times a year.

The period for which **interest** is calculated is called the **conversion period**. At the end of the **conversion period**, the **interest** is added to the **principal** to get the new **principal**.

The formula to calculate the new rate of interest with respect to the **conversion period** is

**Time period=number of years**** **

When **interest** is **compounded half yearly**, the **interest rate **will be half of the annual interest rate.

The formula to calculate the new time period with respect to the conversion period is

**Time period=number of years**

When **interest** is **compounded half yearly**, the **time period** will be doubled.

The formula for **compound interest** can also be used in finding the growth rate of population, rate of increase of bacteria, rate of increase of land rates, etc.

**Time period=number of years**** **

**Time period=number of years**