Interest which is calculated on not only the beginning amount of principal, but the on interest earned as well. For example, compound interest earned over five years on principal of $100 would appear as such:
Year 1: $100 + 5% = (100 * 1.05) = Balance of $105
Year 2: $105 + 5% = (105 * 1.05) = Balance of $110.25
Year 3: $110.25 + 5% = (110.25 * 1.05) = Balance of $115.76
Year 4: $115.76 + 5% = (115.76 * 1.05) = Balance of $121.55
Year 5: $121.55 + 5% = (121.55 * 1.05) = Balance of $127.63
The formula to compute compound interest is:
The variables are as follows:
| Pn = |
Value at end of "n" time periods |
| P0 = |
Beginning Value |
| I = |
Interest |
| n = |
Number of years |
|
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