Watch this scene from a movie called Damini. Mr. Sunny deol teaches us about the repetition of tarikh(Date).
Mr. Sunny Deol tries his best to drill this into your head. He is very angry in this particular scene and beautifully explains the frustration and annoyance of a common man over extension of court cases. Court cases extend due to date being given to the petitioner again and again.
Please replace the word ‘Tarikh’ with “Interest”. This will help you remember that Compound interest is always ‘Interest on Interest’. (Interest pe Interest). Let’s understand this with an example: If Rs. 20,000 are deposited at the rate of 7.5%, what will be the interest after 15 years if it is compounded yearly?
Now, 7.5% on 20,000 for first year is 1,500. However, In the second year interest will be charged on 7.5% on 21,500( 20,000+1500). Let’s look at the third year, here interest will be received on 23,113 (i.e. on the amount 21,500+1,613). Or you can simply understand as: 1st year interest = 1,500; 2nd Year interest = 1,500+1,613 = 3,113 and so on. To put it simply, it’s interest on interest.
Insaaf nhi mila, milee toh bas Taarikh. If you deposit your money in a public provident fund (PPF) account. I would have to disagree and say aapko mila hain interest pe interest. 🙂
[…] Interest is given to you, when you deposit and interest is taken from you, when you borrow or take a loan. Hence, Interest is the cost of borrowing. Simple interest is the you earn on initial investment only while compound interest is interest you earn on the initial investment and on previous interest. […]
[…] This is the interest one earns on the initial investment plus previous interest. Because you are earning ‘interest on interest’. […]