Compound Interest

Today, we learned how to calculate Compound Interest problems.

Compound Interest
is a system which adds the accumulated interest to the principal, such that the interest earned is based on that adjusted principal.

Here's the formula for calculating Compound Interest and what it means.





A = final amount at the end of the term
P = principle amount
1 = preserves original investment
r = rate in decimal number
n = number of times compounded
t = time in years

Knowing the formula, we can now calculate Compound Interest.

Here's an example.

Justin decided to invest $1000 for 2 years. The bank told him that the interest rate will be 5.25% and will be compounded semi-annually. How much will Justin end up with after 2 years?

Solution:







TVM (Time Value Money) solver does all the calculation for us. Here's what a TVM solver screen look like.




N = time x number of times compounded
I% = interest rate in %
PV = present value
PMT = payment made to the account
FV = Future Value
P/Y = # of payments per year
C/Y = # of times compounded per year


the next scribe will be....


Jason. :)