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How do I calculate compounded interest annually?


1 year ago

Answered By Arsalan Q

Compound interest is solved with the equation A=P(1 + r/n)(nt)

First I'll break down how to read this, then ill give you a practice problem with it so you understand the application as well

A: is what you're solving for, the total amount of the future investment based on some monetary gain over some stretch of time

P: is the principal investment, also known as how much cash you initially invested to gain interest on

r: the annual interest rate, as a decimal not percent, 12% interest is represented by 0.12 in the equation

n: the number of times the compound takes effect within a year, so if its annually, n is 1, if its monthly, n is 12, quarterly is 4 etc.

t: how long you invested money for

Practice problem solve:

assume you invest $5000 into a savings account that has an interest rate return of 5% a year, compounded annually. How much money would you have after 10 years?

P= $5000

r= 5%= 0.05

n=1 because it only returns 5% after a full year, so one time

t= 10


A= 5000(1+(0.05/1))(1x10)

A= $8144.47

so the investment would grow to $8144.47 when compounded annually for 10 years


Hope this helped :)