Compound Interest Rate Formula Math

The principal is the amount of money you deposit that you expect will grow over time. Problem suppose 5000 dollars is deposited in an account that earns compound interest that is done annually. And by rearranging that formula see compound interest formula derivation we can find any value when we know the other three.

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Let s look at an example.

Compound interest rate formula math. Compound interest formula a simpler version of the compound interest formula is b p 1 r n where b is the final balance p is the principal r is the interest rate for 1 or each interest period and n is the number of payment periods. Due to being compounded monthly the number of periods for one year would be 12 and the rate would be 1 per month. A p 1 r 5. The bank gives you a 6 interest rate and compounds the interest each month.

The basic formula for compound interest is. Continuously compounded interest is a great thing when you are earning it. The value after 2 years will be 3 606 39. Finds the future value where.

A is the amount of money accumulated after n years including interest. Fv pv 1 r n. This formula makes use of the mathemetical constant e. Example of compound interest formula.

A p 1 r m m t 3500 1 0 015 4 4 2 3606 39. A p 1 r n. N number of periods. To calculate continuously compounded interest use the formula below.

There are other types of questions that can be answered using the compound interest formula. I would choose option 1. A p 1 r n n t a 1 000 000 1 06 12 12 5 a 1 000 000 1 0 005 12 5 a 1 000 000 1 005 60 a 1 348 850 15. However if you borrow for 5 years the formula will look like.

In the formula a represents the final amount in the account that starts with an initial principal p using interest rate r for t years. When the interest is compounded once a year. Fv future value pv present value r interest rate as a decimal value and. The formula for compound interest is p 1 r n nt where p is the initial principal balance r is the interest rate n is the number of times interest is compounded per time period and t is the number of time periods.

Pv fv 1 r n. Problems that ask you to solve for the rate r in the compound interest formula require the use of roots or creative use of exponents. N is the number of years the amount is deposited or borrowed for. Suppose an account with an original balance of 1000 is earning 12 per year and is compounded monthly.