Interest can be defined as fee which is paid for money or assets borrowed for a fix duration of time. Money or assets can be borrowed on two conditions that owner will take Interest in compounded form or in simple form. Compound interest is actually interest on interest.
Simply Compound Interest is taken on principal amount in addition with interest.
Lets write general formula to calculate the compound interest. It is given as
Future amount = Principal amount * (1 + interest rate) time Period,
Mathematically, Z = A * (1 + r) t, C.I. = Z – P.
Where 'Z' indicates future amount, 't' is time period for which money is borrowed.
'A' denotes principal value, 'r' is interest rate or periodic rate which is always fixed. It cannot be changed in future.
Now it is easy to calculate monthly or weekly or daily compound interest using above formula. The change will only be in interest rate.
Lets derive the formula to find how to calculate compound interest monthly.
For this we have to divide annual interest rate (r) by 12 since there are 12 months in a year.
Suppose that principle amount is $ 5000 and if rate of interest is 5% then after one year interest that has to be paid, is $ 250. Thus at the end of the year the net amount will be $ 5250.
Divide the interest rate by 12 to calculate the monthly compound interest. In this case the 5% (0.05 in Decimals) is divided by 12 (0.05/12) which equals 0.0042, if principal amount is $ 5000 then multiply it by 0.0042 which equals 21.00.