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Example:Calculate Amount and Compound Interest

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Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or, money earned by deposited funds. When money is borrowed, interest is typically paid to the lender as a percentage of the principal, the amount owed. The percentage of the principal that is paid as a fee over a certain period of time (typically one month or year), is called the interest rate.




Compound interest


Compound interest arises when interest is added to the principal, so that from that moment on, the interest that has been added also itself earns interest. This addition of interest to the principal is called compounding. A bank account, for example, may have its interest compounded every year: in this case, an account with \($\) 1000 initial principal and 20% interest per year would have a balance of \($\) 1200 at the end of the first year, \($\)1440 at the end of the second year, and so on.



A formula for calculating compound interest is A = P *((1+r/n) to the power n*t)


1.  A = final amount

2.  P = principal amount (initial investment)

3.  r = annual nominal interest rate (as a decimal)

(it should not be in percentage)

4.  n = number of times the interest is compounded per year

5.  t = number of years

Example usage: An amount of \($\)1500.00 is deposited in a bank paying an annual interest rate of 4.3%, compounded quarterly. Find the balance after 6 years.

A. Using the formula above, with P = 1500, r = 4.3/100 = 0.043, n = 4, and t = 6:

So, the balance after 6 years is approximately \($\)1,938.84.



