Why does the insurance companies, banks etc use the compound interest method to calculate the amount of interest instead of simple interest method as compound interest method shows higher amount of interest as compared to the other one.

Dear Student,

You must understand the concept of compound interest first. See, if I invest Rs 100 and earn an interest of 10% p.a. on my investment, then at the end of the year I will be entitled to claim Rs 110 (principle + interest). Now, in the second year, I will get interest on Rs 110 @ 10% i.e, Rs 11. This is the concept of compound interest.

Compound interest is a benefit that bank allows to the customers who chose to re-invest than withdrawing out.

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