- Total Interest Earned:
- Final Amount:
- What does Compound Interest mean?
- Compound interest refers to adding of accumulated interest back to the principal. This allows interest to be earned on the top of interest from that moment on. Compounding is the act of declaring the interest to be principal.
- Importance of Compound Interest
- Understanding compound interest is important to your financial well-being. The compound Interest makes a deposit or loan grow at a faster rate than simple interest or SI as it is the interest calculated only on the principal amount.
A = P (1 + r/n) (nt)
- A = the future value of investment, plus interest
- P = principal investment amount (initial deposit amount)
- r = the annual interest rate
- n = number of times interest compounded per year
- t = number of years the money is invested or borrowed for
If an amount of $5,000 is deposited at an annual interest rate of 5%. If it is compounded monthly, the value of the investment after a span of 10 years will be-
Applying the above formula:-
- P = 5000. r = 5/100 = 0.05 (decimal). n = 12. t = 10.
- A = 5000 (1 + 0.05 / 12) ^ (12(10)) = 8235.05.
So, the investment balance after 10 years will be $8,235.05.
- May 15, 2018
- Tool Launched