compound interest formula
The compound interest formula is used to calculate the future value of an investment that earns interest compounded over multiple periods
The compound interest formula is used to calculate the future value of an investment that earns interest compounded over multiple periods. It takes into account the initial principal amount, the interest rate, the number of compounding periods, and the length of time the money is invested.
The formula for compound interest is:
A = P(1 + r/n)^(nt)
Where:
A = the future value of the investment (including interest)
P = the principal amount (the initial investment)
r = the annual interest rate (expressed as a decimal)
n = the number of compounding periods per year
t = the number of years the money is invested
Let’s break down the formula and understand each term:
1. (1 + r/n) represents the factor the principal amount is multiplied by for each compounding period. This factor is derived by adding 1 to the interest rate divided by the number of compounding periods per year.
2. ^(nt) represents raising the factor to the power of the total number of compounding periods, which is the product of the number of compounding periods per year (n) and the number of years (t).
3. Finally, the principal amount (P) is multiplied by the final factor to calculate the future value of the investment (A).
It is important to note that the interest rate (r) used in this formula should be in decimal form. For example, if the annual interest rate is 5%, you would use 0.05 in the formula.
Using the compound interest formula, you can calculate the future value of an investment over time, which can help in financial planning and decision-making.
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