Question

discuss the power and importance of compounding interest. Provide real-life examples of compounding interest applications.

Answer 1

The power of compounding interest lies in the fact that interest is earned on interest in compounding interest. Every time interest is earned, it is accumulated and then interest is calculated on the revised amount of principal plus interest.

It makes a significant difference in the effective rate of return earned.

In real life,

Compound interest is earned on savings and bank deposits.

In some loan arrangements, interest is paid on combined amount of principal plus outstanding interest.