Compound Interest

Compound interest is interest which is calculated on the principal sum for the first year and on the accruing amount for the remaining years.

For example, to find the compound interest earned when $5000 is invested at 10% per annum for 3 years:

-Find the interest earned for the first year.

-Add the principal to the interest for the first year, which sums to the principal at the beginning of the second year.

-Find the interest earned for the second year.

-Add the principal at the beginning of the second year to the interest earned for the second year, which sums to the principal at the beginning of the third year.

-Find the interest for the third year.

-Sum the interest for the first, second and third years, which equals to the Compound interest.

There is however a much simpler way to obtain the compound interest, this is done by using the amount accruing formula below:

Below, the compound interest found above is determined using the formula.

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