* When entering the percentage value, input the percentage without a decimal -- i.e. 5% is 5; the calculator considers the decimal
Principal: The money you invest with a bank or investment company.
Interest rate: The amount of money you get paid yearly for every dollar you invest
Time: Length of time money will be in the bank or with the investment company.
Compound Frequency: How often interest is calculated.
Compounded yearly = 1
Compounded semiannually (6 month basis) = 2
Compounded quarterly (4 month basis) = 4
Compounded monthly = 12
Compounded daily = 365
The following is a really good explanation of compounding interest and simple interest
The formula to calculate compound interest (when finding A) is:A = P(1 + r/n)nt
- A = Amount of investment after interest has been compounded
- P = Principal amount (initial investment)
- r = Annual interest rate
- n = Number of times the interest is compounded per year
- t = Number of years (time)
I am working on this article!
Jayden has $5,000 to invest. If he deposits the money in a savings account, the bank will pay him 4.7% interest compounded quarterly. How much will he have if he keeps the money in the savings account for 5 years.?
Find A using the formula. First determine your variables:
- P = $5,000
- r = 4.7%
- n = Quarterly (it will compound 4 times a year)
- t = 5
The formula will look like the following:
A = $5,000 (1 + .047/4)4 * 5
A = $6315.89
Jayden will have $6315.89 if he invests his money for 5 years based on the interest compounding!
Chase started an office organizing business and has been working all summer. He has saved $4370 and isn't sure if he should put his money in a CD that guarantees 3.9% compounded monthly for a five year term, or if he should put it in a savings account that will accrue interest at 4% semi-annually. While the savings account gives him more flexibility to use the money if needed, he is curious to see how much more he will have if he puts his money in the CD.
By using the compound interest formula, he finds the following:
After the five year period in the CD, he will have $5309.23.
After the five year period in the savings account, he will have $5327.01
Even though the CD compounds monthly, he actually stands to earn more from the savings account earning 4% compounding semi-annually.