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Compound Interest

This document explains the compound interest formula and provides examples of how to calculate the final balance of an investment earning interest that is compounded at different frequencies, from daily to yearly to continuously. It shows that compounding more frequently results in higher returns over time, as interest earns interest in smaller increments. Examples are given to demonstrate calculating the balance of investments earning 5% interest compounded daily for 6 years and 8% interest compounded at different rates for 10 years.

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112 views1 page

Compound Interest

This document explains the compound interest formula and provides examples of how to calculate the final balance of an investment earning interest that is compounded at different frequencies, from daily to yearly to continuously. It shows that compounding more frequently results in higher returns over time, as interest earns interest in smaller increments. Examples are given to demonstrate calculating the balance of investments earning 5% interest compounded daily for 6 years and 8% interest compounded at different rates for 10 years.

Uploaded by

Black Ink Tutorials & Services
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Compound Interest

(n t)
r
A = P 1 +
n
Amount (Final Balance: Principal + Interest)
Principal (Starting amount)
rate (as a decimal)
number (number of times compounded per year)
time (in years)

Ex) Invest $800 at 5% annual interest, compounded daily, for 6 years.


( )
(365 6)
A = $800 1 + 0.05
365
= $1079.86
A = 800 ( 1 + 0.05 / 365 ) ^ (365 * 6) = $1079.86

Ex) Suppose that you invest $1000 in an account that earns 8% annual interest. Find the
balance in the account at the end of 10 years if your money is compounded:

Compounded Value of n Calculator Notation Amount


Use the formula: A = P + Prt
Simple Interest N/A $

Yearly n=1 1 0 0 0 (1 + 0 . 0 8 / 1) ^ (1 * 1 0) $

Quarterly n=4 $

Monthly n = 12 $

Daily n = 365 $

Use the formula: A = Pe r t


Continuously!!! n $

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