Understanding Compound Interest: Formula and Examples
This guide explains the concept of compound interest, including the key formula components: principal amount (P), annual interest rate (r), time in years (t), and frequency of compounding (n). Learn how to calculate the total amount (A) accumulated after a set period under various compounding frequencies such as daily, monthly, quarterly, semiannually, and annually. We provide practical examples to illustrate the calculations, making it easier for you to understand how investments grow over time.
Understanding Compound Interest: Formula and Examples
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Presentation Transcript
Notes 4.10 Compound Interest
Compound Interest Formula: • P = principal amount (the initial amount you borrow or deposit) • r = annual rate of interest (as a decimal) • t = number of years the amount is deposited or borrowed for. • A = amount of money accumulated after n years, including interest. • n = number of times the interest is compounded per year
Compounding Words: • “Daily” =365 • “Monthly” = 12 • “Quarterly” =4 • “Semiannually”=2 • “Annually” = 1
Ex: An amount of $1,500.00 is deposited in a bank paying an annual interest rate of 4.3%, compounded quarterly. What is the balance after 6 years? • P =1500 • r = .043 • t = 6 • n =4
$6,500 at 8% compoundedmonthly for 7 years? • P =6500 • r = .08 • t = 7 • n =12
$4000 at 6%, compounded quarterlyfor 5 years? • P =4000 • r = .06 • t = 5 • n =4
A man invests $10, 000 in an account that pays 8.5% interest per year, compounded Daily. What will he have after 3 years? • P =10,000 • r = .085 • t = 3 • n =365
