Compound Interest

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Compound Interest

  1. 1. T- 1-855-694-8886 Email- info@iTutor.com By iTutor.com
  2. 2. Compound Interest  Simple interest is generally used for loans of one year or less. For loans of more than one year, the interest paid on the money borrowed usually use compound interest.  Compound interest is interest calculated not only on the original principal, but also on any interest that has already been earned. …the calculation of interest over the life of the loan or investment Example: Principal + prior period interest = $1100.00 Interest is now calculated on $1100.00 Let’s assume that the interest rate is 10% pa. Principal(Compounded) * 0.10 = $110.00 New P $1210.00 to start next period
  3. 3. Graphically 100 110 121 1000 1210 1331 1100 100 100 110 Time(Years) 0 1 2 3 4 Amount $1000 110 Interes t Interes t 100 Interes t 133.1 Compounding Period Compounding Period Compounding Period Compounding Period Interes t 121
  4. 4. Compounding Frequencies and Periods Frequency No. per Year Period Annually 1 1 year Semiannually 2 6 months Quarterly 4 3 months Monthly 12 1 month Daily 365 1 day Period Interest Credited Times Credited per year Rate per compounding period Annual year 1 R Semiannual 6 months 2 Quarterly quarter 4 Monthly month 12 2 R 4 R 12 R
  5. 5. Compound Interest Formula (n)Total Number of Period Nominal or Annual Rate ( j ) Periodic Rate per period (i ) Number of compounding per year (m) To Determine n To Determine i # of Compounding Frequencies p.a.(m)Time(Years) Annual Interest Rate( j ) # of Compounding Frequencies p.a. (m) *
  6. 6. Formula …is the compounded amount and is the FINAL amount of the loan or investment at the end of the last period! ...is the value of a loan or investment TODAY! PV= Present Value(Principal) i = rate per period n = number of periods FV = PV(1 + i)n Where…
  7. 7. Example  Find the amount to which $1500 will grow if compounded quarterly at 6.75% interest for 10 years.  Solution:  Use future value formula  Here PV = $1500, i = , n = 10  4 FV = 1500(1+0.016875)40 FV = 2929 FV = PV(1 + i)n 4 0675.0
  8. 8. The End Call us for more Information: www.iTutor.com 1-855-694-8886 Visit

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