How to calculate CI for 6 months?

Calculating Compound Interest for 6 Months

Compound interest differs significantly from simple interest, particularly over longer periods. This is because compound interest takes into account the interest earned on previous interest payments, leading to exponential growth.

Formula for Compound Interest:

A = P * (1 + r/n)^(nt)

• A: Final amount
• P: Principal amount
• r: Annual interest rate
• n: Number of times interest is compounded per year
• t: Number of years

Quarterly Compounding (n = 4)

When interest is compounded quarterly, n = 4, and the formula becomes:

A = P * (1 + r/4)^(4t)

Example

Consider a principal of ₹10,000 invested for 6 months (t = 0.5 years) at an annual interest rate of 12% (r = 0.12).

Simple Interest Calculation:

Simple interest: I = P r t = 10,000 0.12 0.5 = ₹600

Final amount: P + I = 10,000 + 600 = ₹10,600

Compound Interest Calculation:

A = 10,000 (1 + 0.12/4)^(4 0.5)
A = 10,000 (1.03)^2
A = 10,000 1.0609
A = ₹10,609

As evident, the final amount calculated using compound interest is slightly higher than that calculated using simple interest, highlighting the impact of interest earned on interest. This difference becomes more significant over longer periods.

Conclusion

Compound interest is an important concept in finance that can lead to significant returns over time. By understanding how to calculate compound interest, individuals can make informed investment decisions and maximize their savings.