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=P(1+(r/n))^(nt)

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 :)