One very important exponential equation is the compound-interest formula: ... If interest is compounded yearly, then n = 1; if semi-annually, then n = 2; quarterly, then n = 4; monthly, then n = 12; weekly, then n = 52; daily, then n = 365; and so forth, regardless of the number of years involved.
Who benefits from compound interest?
As the principal, interest rate, and compound periods increase, so does the future value of an investment. It doesn't matter if you are just putting some money into short-term, low rate savings accounts or CDs or long-term, higher return investments, compound interest will work for your benefit if you allow it.
Why would you use compound interest?
Simple interest simply means a set percentage of the principal every year, and is rarely used in practice. On the other hand, compound interest is applied to both loans and deposit accounts. Compound interest essentially means "interest on the interest" and is the reason many investors are so successful.
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An investment earns 3% compounded monthly. Find the value of an initial investment of $5,000 after 6 years.
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Earns 3% compounded monthly: the rate is r=0.03 and the number of times compounded each year is m=12
Initial investment of $5,000: the initial amount is the principal, P=5000
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You are trying to find A, the future value (the value after 6 years). Now apply the formula with the known values:
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Answer: The value after 6 years will be $5,984.74.
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What is the value of an investment of $3,500 after 2 years if it earns 1.5% compounded quarterly?
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As before, we are finding the future value, A. In this example, we are given:
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Answer: The value after 2 years will be $3,606.39.
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Find the compound amount which would be obtained from the interest of Rs.2000 at 6% compounded quarterly for 5 years.
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Let principal = 2000, r=6%=64×100=.015, n=5×4=20quarters
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