Compound interest refers to the interest calculated on the initial principal, including all the accumulated interests from the previous periods. That is why it is known as ‘interest in interest.’ Well, this compound interest is the most important topic if you want to become a successful investor like Warren Buffet in the future. That is why he wrote: “My wealth has come from a combination of living in America, some lucky genes, and compound interest.”
Also read:
The compounding of interest can take place on various frequency schedules, from per day, to annually.
The basic principle to know is:-
“Higher the number of compounding periods, the greater the amount of compound interest.”
What is the Formula of Compound Interest?
To calculate compound interest, you should know the principal amount, annual interest rate, the time factor, the number of compound periods. After having these figures, you can calculate compound interest by using its formula.
The formula for calculating compound interest, including principal sum, is:
A = P (1 + r/n) (nt)
In the formula, the symbols represent:
- A = the future value of the investment/loan, including interest
- P = the principal investment amount (the initial deposit or loan amount)
- r = the annual interest rate (decimal)
- n = the number of times that interest is compounded per unit t
- t = the time the money is invested or borrowed for
Calculating the compounded interest (without principal) = P (1 + r/n) (nt) – P
Example:-
If P = $5000 , r = 10%, n = 1, t = 3, then A = $6655
How to Find Interest Rate, Principal, and Time
The following are formulae that you need to calculate different figures through compound interest:
The Formula of Interest Rate
If you want to calculate the yearly interest rate on your loans to buy a house, then use the following formula.
r = n[(A/P)1/nt-1]
Note: Multiply your result by 100 to get a percentage figure (%).
The Formula for Principal
If you want to know how much you would need to buy something through a loan then you should use the following formula:
P = A/(1+rn)nt
The Formula for Time
For calculating the period of different payments, use the following formula:
t = In (A/P) / n [ In (1+r/n) ]
So these are formulae that you can use to calculate compound interest or different components like interest rate, time, and principal. We hope the methods mentioned above will help you to know how to calculate compound interest. If you need to know more about it, contact us to get maths homework help from professionals.
