Calculate Compound Interest

Formula for Compound Interest

Compound interest is a great thing when you are earning it! Compound interest is when
a bank pays interest on both the principal (the original amount of money) and the interest
an account has already earned.

To calculate compound interest use the formula below. In the formula, A represents the
final amount in the account after t years compounded 'n' times at interest rate
'r' with starting amount 'p'.

Practice Problems

Problem 1

If you have a bank account whose principal = $1000, and your bank compounds
the interest twice a year at an interest rate of 5%, how much money do you have in your
account at the year's end?

Hide answer
f you start a bank account with $10,000 and your bank compounds the interest quarterly
at an interest rate of 8%, how much money do you have at the year's end ? (assume
that you do not add or withdraw any money from the account)

Hide answer

Compound Interest Word Problem

Q: If I put $150.00 in an account that pays 6% compounded twice a year, how much will I have in 10
years?

A: Heres a formula for compound interest. You will have an amount equal to A dollars if you
invest Pdollars, where the interest rate is r, n is the number of years you leave it in the account,
and q is the number of times it is compounded in one year.
For your question:

P = $150
r = 6% = 0.06
n = 10
q=2
A=?

Note: Make sure you do the exponent part first (1.03^20) = 1.8061, because of
BEDMAS. E (exponents) comes before M (multiplication).

So you will have $270.92 after 10 years.

Problem
If you deposit $4500 into an account paying 7% annual interest compounded semi anualy ,
how much money will be in the account after 9 years?
Result
The amount is $8358.7 and the interest is $3858.7.
Explanation
STEP 1: To find amount we use formula:
A = total amount
P = principal or amount of money deposited,
A=P(1+rn)nt
r = annual interest rate
n = number of times compounded per year
t = time in years

In this example we have

 P=$4500 , r=7% , n=2 and t=9 years

After plugging the given information we have

AAAA=4500(1+0.072)29=45001.03518=45001.857489=8358.7

STEP 2: To find interest we use formula A=P+I, since A=8358.7 and P = 4500 we have:

A8358.7II=P+I=4500+I=8358.74500=3858.7

Problem
How much money would you need to deposit today at 8% annual interest
compounded monthly to have $1200 in the account after 12 years?
Result
The principal is $460.72.
Explanation

To find amount we use formula:

A = total amount
P = principal or amount of money deposited,
A=P(1+rn)nt
r = annual interest rate
n = number of times compounded per year
t = time in years

In this example we have

A=$1200 , r=8% , n=12 and t=12 years

After plugging the given information we have

120012001200PP=P(1+0.0812)1212=P1.00667144=P2.604631=12002.604631=

460.72

Problem
Suppose that a savings account is compounded yearly with a principal of $1700. After 2
years years, the amount increased to$1910. What was the per annum interest rate?
Result
Interest rate per anum was 6%.
Explanation

To find interest rate we use formula:

 A = total amount
P = principal or amount of money deposited,
A=P(1+rn)nt
r = annual interest rate
n = number of times compounded per year
t = time in years

In this example we have

A=$1910 , P=$1700,t=2 years and n=1

After plugging the given information we have

19101910(1+r1)2(1+r1)2ln(1+r1)22ln(1+r1)ln(1+r1)ln(1+r1)1+r11+

r1r1r=1700(1+r1)12=1700(1+r1)2=19101700=1.12353 Take the natural

logarithm of each
side=ln(1.12353)=ln(1.12353)=ln(1.12353)2=0.05824=e0.05824=1.05996935783=0.
0599693578315=0.05996935783156%