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Compound Interest Formula

The document explains the compound interest formula and provides examples of how to calculate the final amount of an investment given the principal amount, interest rate, time, and frequency of compounding. It also includes practice questions related to compound interest calculations.

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Елизавета Лебедева
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© © All Rights Reserved
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127 views

Compound Interest Formula

The document explains the compound interest formula and provides examples of how to calculate the final amount of an investment given the principal amount, interest rate, time, and frequency of compounding. It also includes practice questions related to compound interest calculations.

Uploaded by

Елизавета Лебедева
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Compound Interest Formula

Number of years money


Interest Rate as a decimal
will be invested

𝑖 𝑡×𝑛
𝐴 = 𝑃 �1 + �
𝑛
Number of times interest
is compounded per year
Final Amount of Investment Principal Value (initial
value of investment)

Frequency of Compounding Number of times interest is added each year


Annual 1(every year)
Semi-Annual 2(every 6 months)
Quarterly 4(every 3 months)
Monthly 12(every month)
Daily 365(every day)

Example 1: A $ 1 000 investment earns interest at 6 % per annum, compounded annually.


Calculate the amount and interest of the investment after 4 years.
Solution: 𝑖 𝑡×𝑛
𝐴 = 𝑃 �1 + �
𝑛
A=?
0.06 4×1
P = $ 1000 𝐴 = 1000 �1 + �
1
i = 6% = 0.06
n=1 𝐴 = 1000(1.06)4
t=4
𝐴 = 1262.48
∴ the total amount of the investment is $ 1262.48.

Example 2: Find the amount and interest for an investment of $ 5 000 at 8 % compounded
quarterly for 5 years. 𝑡×𝑛
𝑖
Solution: 𝐴 = 𝑃 �1 + �
𝑛
A=? 0.08 5×4
P = $ 5000 𝐴 = 5000 �1 + �
4
i = 8% = 0.08
n=4 𝐴 = 1000(1 + 0.02)20
t=5
𝐴 = 1000(1.02)20

𝐴 = 7429.74

∴The total amount at the end of the 5 years is $ 7 429.74 and the amount of compound interest
earned is $ 2 429.74
Practice Questions
1. Suppose you deposit $750 in an investment account for 5 years at 6% per year.
Determine the amount of the investment if interest is compounded:
a)annually b) quarterly c) monthly

d) Which type of compounding provides the greatest amount? Explain.

2. Determine the amount of each investment. The interest rate is an annual rate.
a) A $2000 GIC that earns 8% compounded quarterly for 3 years.
b) A $1600 bond that earns 6% compounded monthly for 4.5 years.
c) A $750 savings account that earns 4% compounded daily for 1 year.
d) A $1500 bond earning 5% compounded semi-annually for 5.5 years.

3. A loan of $5000, at 12% compounded monthly is due to be repaid in 3 years. How much
needs to be repaid?

4. Jamal’s is getting a raise! 2.75% each year for the next 4 years. His current salary is
$35500 per year. What will his salary be in 4 years?

5. Brett and Steven’s grandparents gave them each $10000 to use when they go to college
in 6 years. Brett invested his in a GIC that paid 2.25% compounded quarterly, while
Steven invested his in a GIC that paid 1.75% compounded monthly. Who made more
money? How much more?

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