The Ultimate Guide to Understanding and Applying the Compound Interest Formula for Investment and Loan Calculations

compound interest formula

if D> 0: 2 real solutionsif D<0: 2 non-real solutions if D=0 : exactly 1 solution

The compound interest formula is used to calculate the amount of money that will accumulate over time on an initial principal amount, with interest being compounded at regular intervals. The formula for compound interest is:

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

Where:
A = the future value of the investment/loan, including interest
P = the principal amount (initial investment/loan amount)
r = the interest rate (expressed as a decimal)
n = the number of times that interest is compounded per time period
t = the number of time periods the money is invested/lent out for

Let’s break down the components of the formula:

(1 + r/n) = the factor by which the principal is multiplied each compounding period. It represents the growth rate of the investment or the increase in debt due to the interest rate.

^(nt) = the exponentiation of the growth factor, representing the number of compounding periods the interest is applied for.

By using the compound interest formula, you can determine the future value of an investment or the total amount of money owed on a loan after considering compounded interest.

More Answers: