Question 1

What is compound interest?

Accepted Answer

Compound interest is interest earned on both the original principal and the interest already accumulated. The formula is A = P × (1 + r/n)^(n×t), where P is principal, r is the annual rate (as a decimal), n is compounding frequency per year, and t is time in years. Unlike simple interest, compounding creates exponential growth — which is why starting to invest early makes such a large difference.

Question 2

What is the difference between simple and compound interest?

Accepted Answer

Simple interest (SI = P × r × t) is always calculated on the original principal only. Compound interest recalculates on the growing balance each period. Example: ₹1,00,000 at 10% for 10 years — SI gives ₹1,00,000 interest (total ₹2,00,000), while compound interest (annual) gives ₹1,59,374 interest (total ₹2,59,374). The difference grows dramatically over time.

Question 3

How does compounding frequency affect returns?

Accepted Answer

More frequent compounding gives higher effective returns. For ₹1,00,000 at 10% for 5 years: annual compounding → ₹1,61,051; quarterly → ₹1,63,862; monthly → ₹1,64,531; daily → ₹1,64,866. The difference between monthly and daily is small, but moving from annual to monthly compounding can add meaningful returns over longer periods.

Question 4

How do I calculate compound interest in Excel?

Accepted Answer

Use the formula =P*(1+r/n)^(n*t). If principal is in A1, annual rate in B1, compounding frequency (per year) in C1, and years in D1: =A1*(1+B1/C1)^(C1*D1). For a fixed deposit of ₹1,00,000 at 7.5% compounded quarterly for 3 years: =100000*(1+7.5%/4)^(4*3) = ₹1,25,023.

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Compound Interest — Frequently Asked Questions