Compound Interest - How To’s
Compound Interest - How To’s
Here, we will show you many examples as to how to use the compound interest formula 
.
(Scroll down to see answers)
NOTE: When people say “interest rate”, they are usually referring to the “annual interest rate”.
1) You invest $1,000 at an interest rate of 5% compounded twice a year. How much money do you have in your account after one year?
2) You invest $10,000 at an interest rate of 8% compounded quarterly. How much do you have in your account after 1 year? (assuming that you didn’t touch the money)
3) Your credit card company charges 12.49% interest compounded monthly. You charge $1,200 to your credit card and don’t make any of the monthly payments. After 6 months, how much do you owe your credit card company?
Answers:
1) We want to find the amount of money after 1 year. Therefore “t”, the number of years = 1. The interest is compounded twice per year; therefore there are 2 compound periods in this one year. So, n (the # of compound periods) equals 2.
PV = 1,000
r = 5% or 0.05
t = 1
n = 2
From 
,
FV = PV (1 + 0.05/2)^(2*1)
FV = PV (1.025)^(2)
FV = $1050.63
2)
t = number of years = 1
r = 8% or 0.08
n = number of compound periods per year = 4. Because it is compounded quarterly, there are 4 compound periods in one year.
PV = 10,000
FV = 10,000 (1 + 0.08/4)^(4*1)
FV = 10,000 (1.02)^(4)
FV = $10,824.32.
3)
t = number of years = 0.5
n = number of compound periods per year = 12
r = annual interest rate = 12.49% or 0.1249
PV = 1200
FV = ?
FV = 1200(1 + .1249/12)^(12*0.5)
FV = 1200(1 + 0.0104)^(6)
FV = 1200(1.0104)^(6)
FV = $1,276.92
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Calculators - Compound Interest
Compound Interest Formula
Compound-Simple Comparison
