Compound Interest
Interest earned on both the initial principal and the interest
reinvested from prior periods. Go here to learn more about compound
interest.
Consider
you found an investment that pays 15% annual interest, which sounds fantastic
to you! This makes you invest $1000 in to it, how much will you have in
3 years? How much will you have in 7 years? And at the end of 7 years,
how much interest will you have earned, and how much of it will be compounding
interest?
Note: We recommend you try this problem without looking at the solution
below first, however if you get stuck, feel free to take a peak!
a) Future Value = $1 x (1 + r)t
= =$1 x (1 + 0.15)3 = $1.153 = 1.520875
x $1000 = $1,520.875
b) Future Value = $1 x (1 + r)t
= =$1 x (1 + 0.15)7 = $1.157 = 2.66002 x
$1000 = $2,660.02
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You invested $1000 x 15% = $150 simple interest
each year, thus total simple interest in 7 years = $150 x 7 = $1,050
Compound Interest = Total Interest
– Simple Interest
Compound Interest = $1,660.02
-$1050
Compound Interest = $610.02
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