compound interest formula
The compound interest formula is used to calculate the future value of an initial investment or principal, when compounded over a specific period of time at a certain interest rate
The compound interest formula is used to calculate the future value of an initial investment or principal, when compounded over a specific period of time at a certain interest rate.
The general formula for compound interest is:
A = P(1 + r/n)^(nt)
Where:
A = The future value of the investment
P = The principal amount (initial investment)
r = The annual interest rate (expressed as a decimal)
n = The number of times that interest is compounded per year
t = The number of years
Let’s break down the formula with an example:
Suppose you invest $5,000 in a savings account that compounds interest annually at a rate of 6%. After 3 years, how much will your investment be worth?
Using the compound interest formula:
P = $5,000 (the principal amount)
r = 6% = 0.06 (the annual interest rate as a decimal)
n = 1 (interest is compounded annually)
t = 3 (the number of years)
Plugging the values into the formula:
A = $5,000 * (1 + 0.06/1)^(1*3)
A = $5,000 * (1 + 0.06)^3
A = $5,000 * (1.06)^3
A = $5,000 * 1.191016
A ≈ $5,955.08 (rounded to two decimal places)
Therefore, after 3 years of compounding interest, your investment would be worth approximately $5,955.08.
It’s important to note that the formula can be modified based on the frequency of compounding interest. For example, if interest is compounded quarterly (n = 4), the formula would be:
A = P(1 + r/n)^(nt)
Make sure to adjust the values accordingly when using the formula for different compounding periods.
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