Question

Where do we use compound interest?

Answer 1

Hint: In order to give answer to this question first we will recall the definition of compound interest. Then we will discuss the application areas of compound interest.

Complete step by step solution:
Basically there are two types of interest one is simple interest and second is compound interest.
We know that compound interest is the interest calculated on the principal and the interest accumulated over the previous time period. The formula for compound interest is
$CI=\operatorname{P}{{\left( 1+\dfrac{R}{100} \right)}^{T}}-P$
Where, P = Principal
R = rate of interest
T = time period.
In other words we can say that compound interest is the interest on the interest.
For example if we keep a fixed amount in the bank then we get some interest every year and that interest is added into the original amount. Also the interest is not the same for every year but it increases every year.
Compound interest is used in saving accounts, credit cards, student loans, mortgages and other personal loans.
Some daily life applications of compound interest are increase in population, growth of bacteria, depreciation in the value of an item, rise in the value of an item, decrease in population.

Note: Compound interest is different from simple interest. The simple interest is the same for every year but the compound interest is different for each year. The value of compound interest is always greater than the simple interest. The simple interest is calculated as
$SI=\dfrac{P\times R\times T}{100}$
Where, P = Principal
R = rate of interest
T = time period.