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Compound Interest Formula / How to calculate compound interest / Compounding of Interest on Fixed Deposits Explained: Compound interest arises when interest is added to the principal so that from that moment on, the interest that has been added also itself earns interest. This addition of interest to the principal is called compounding. The following formula gives you the total amount one will get if compounding is done:-

A = Final Amount that will be received

P = Principal Amount (i.e. initial investment)

r = Annual nominal interest rate (as a decimal i.e. if interest is paid at 5.5% pa, then it will be 0.055) (it should not be in percentage)

n = number of times the interest is compounded per year (i.e. for monthly compounding n will be 12, for half year compounding it will be 2 and for quarter it will be 4

t = number of years

[To arrive at the interest amount you can further use the formula Interest = A - P ] Example: Let us assume that an amount of Rs. 1500/- is deposited in a bank for 6 years and paying an annual interest rate of 4.3%, compounded quarterly.

A. Thus, the above formula values will be P = 1500, r = 4.3/100 = 0.043, n = 4, and t = 6:

So, the balance after 6 years is Rs.1,938.84 (or rounded to Rs.1939).

[To arrive at the interest amount = A - P = 1938.84 - 1500 = Rs. 438.84 ]