The Complete Guide to Using the Compound Interest Formula for Investment and Loan Calculation

compound interest formula

The compound interest formula is used to calculate the future value of an investment or loan, taking into account both the principal amount and the interest, which is compounded periodically

The compound interest formula is used to calculate the future value of an investment or loan, taking into account both the principal amount and the interest, which is compounded periodically.

The formula for compound interest is:

A = P(1 + r/n)^(nt)

In this formula:

A: represents the future value or the total amount including interest.
P: stands for the principal amount or the initial investment/loan.
r: represents the annual interest rate, expressed as a decimal.
n: denotes the number of compounding periods per year.
t: represents the number of years.

Here’s how to use the formula step by step:

1. Convert the annual interest rate to a decimal by dividing it by 100. For example, if the annual interest rate is 5%, it becomes 0.05 in decimal form.
2. Determine the compounding frequency. If the interest is compounded annually, n would be 1. For semi-annual compounding, n would be 2, for quarterly compounding, n would be 4, and so on.
3. Plug in the values of P, r, n, and t into the formula.
4. Calculate the result using order of operations (BEDMAS/BODMAS), ensuring to raise the expression (1 + r/n) to the power of (nt).

The result obtained using this formula will give you the total amount, including the principal and compounded interest, after a specified number of years.

It’s worth noting that the compound interest formula assumes that the interest is compounded at regular intervals and that no additional investments or withdrawals are made during the time period.

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