Compound Interest Formula
P = principal
r = interest rate as a decimal
n = number of times compounded per year
t = number of years
The compound interest formula will determine A, the future value a particular investment will have. In order to find
Example 1:
If $10,000 is invested into an account that is compounded quarterly with a 3.2% interest rate for 10 years, what is the future value of the investment?Step 1:
Find the variables.
P = 10,000 which is the initial amount
r = .032 which is 3.2% as a decimal
n = 4 since it is compounded quarterly
t = 10 since it is the number years
Step 2:
Substitute variables into formula.
Step 3:
Simplify.
A = 10000(1.008)40
A= 13,753.76
Answer:
The future value of the investment is $13,753.76.
Example 2:
If $ 4,000 is put into a monthly compounded account earning 4.3% interest, how much will the account be worth after five years?
Step 1:
Find the variables.
P = 4000 since that is the initial investment
N = 12, since it is compounded monthly
R = .043 which is 4.3% as a decimal.
T = 5 since that is the number of years
Step 2:
Substitute variables into formula.
Step 3:
Simplify.
A = 4000(1.0036)60
A = 4962.48
Answer:
The future value is $4,962.48
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