In simple interest, interest charge on investment or principal money.
In Compound Interest, Interest charge on principal + Accumulated Interest.
Balance after completing 1 years=Balance in the starting + interest after 1 years
For calculating Interest =
First Year’s balance= 25000Rs
First Year’ Interest =
Now, balance after the first year= First Year’s balance +First Year’s Interest
Second Year’s Balance= 27000Rs
Second Year’s Interest=
Balance after the second year = Second Year’s Balance + Second Year’s Interest
In this question we were calculating compound interest, as I mention above interest charge on principal or investment. As you can see I am adding interest in principal value to calculate next year interest.
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