College Math

For instance, suppose you invest $1000 in bank at the rate of 10% for one year. Using the simple interest formula, the amount at the end of one year becomes $1100. Now if you do not withdraw the interest and leave this amount invested, then next year, you earn interest not on $1000 but on $1100, and at the end of second year, this amount becomes $1210 and so on. This is known as compounding of interest. The formula for calculating compound interest would be: = ∗ (1 + ) Where, A = Maturity amount P = Principal Sum r = annual interest rate (in decimal form) n = number of compounding periods per year t = time (in years) For instance, George took a loan from bank for $8,000 at the annual rate of 7.5%payable after 6 years. What is the amount that he is supposed to pay at the end of 6 years? Here, we make use of compound interest. P = 8000, r = 0.075 and t = 6. Substituting the values in formula, we get = 8000 ∗ �1 + . 075 1 � (1∗6) Compound Amount = $12,346.41 Suppose this amount is compounded quarterly. Then the number of compounding periods has to be adjusted. In this case, compounding will be done four times every year. = 8000 ∗ �1 + . 075 4 � (4∗6) Compound amount = $12,494.33 The amount of compound interest can be calculated by using the following formula: Compound Interest (CI) = Compound Amount – Principal sum

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