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What is Compound Interest?

Compound Interest

Compound interest differs to simple interest because the principal grows with the interest earned each period.

For compound interest, interest is calculated on the principal plus any interest earned. The accumulated amount.

Because of this, compounding grows an investment quicker that simple interest can, so long as you are happy to leave the money in the investment!

Compare simple and compound interest on this table.

Simple interest for 2,400 invested for 3 years at 9%

2,400 x 3 years at .09 = 648.

Now compare compound interest where the interest earned adds to the principal.

what is compound interestCalculate compound interest in one calculation with this formula.

This formula calculate the compound value or future value.

Future Value (accumulated value)  (S) = P (1 + i) ⁿ

Where

    P = Principal

     i = interest rate for each period

    n = the number of periods

So, if Future Value (S) = P (1 + i) ⁿ

S = 2,400(1 + .09)³

S = 2,400(1.295) = 3,108.0696

or rounded to 2 decimal places S = 3,108.07

Now take the the original principal away from this compounded value to find the compound interest.

S – P = Compound Interest

3,108.07 – 2,400 = 708.07

 

You can you use you iPhone calculator to do financial calculations


Your iPhone or smartphone calculator can do the complex financial calculations once only found on a scientific calculator.

Open the calculator and turn the phone sideways to see the screen pictured.

To do financial calculations that include interest and time periods, you will need to use the x to the power of y – the circled function.

  1. Enter the x number,
  2. press the x to the power of y,
  3. enter the y number and
  4. then =
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