The Power of Compound Interest - How does Power of Compounding Work :

 

The power of compounding works by growing your wealth exponentially. It adds the profit earned back to the principal amount and then reinvests the entire sum to accelerate the profit earning process. Suppose, you invest ₹ 1000 in a bank that offers 10% interest per annum.

 

One very important exponential equation is the compound-interest formula:

 

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

 

Where

"A" is the ending amount

"P" is the beginning amount (or "principal")

"r" is the interest rate (expressed as a decimal)

"n" is the number of compoundings a year

"t" is the total number of years

 

How often is interest compounded?

The frequency of compounding may vary across banks. They usually calculate according to their own will. However, in practice, only a few methods of compounding are used:

 

Annual compounding : Interest is calculated once a year

Half-yearly compounding : Interest is calculated every six months

Quarterly compounding : Interest is calculated once every three months

Daily compounding : Interest is calculated every day