How do you calculate the interest for Compound Interest?
Posted on March 15, 2010
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We’re doing this in math class, and I keep getting it wrong. On the equation sheet is says I = Prt, but that’s only for simple interest. I tried that formula for compound interest too, but I kept getting the wrong answer.
Unless the answers at the back of the textbook are wrong. . . Again.
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2 Responses to “How do you calculate the interest for Compound Interest?”
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Yes, that is for simple interest where P is principal, r is rate and t is time.
Interest just means how much money has accumulated over time. So in compound interest, if you have P value to start with at a rate i, it will accumulate to
F = P(1 + i)^t at time t
Thus, the interest earned, is
P(1+i)^t – P
In words, it is how much it is worth at time t subtract off how much you initially put in.
Hope this helps.
The first person to answer was correct, unless compounding is included. Let’s say you want to compound the interest “m” times per year, then the formula becomes:
F = P(1 + i/m)^(t*m)
If you are only compounding the interest one time per year, then m=1, and the formula reduces to what the first answer was.