There is also " continuously compounded" interest. With that information in hand, we can use the equation for the sum of a geometric series to compute all of the values needed. Using the letters wikipedia uses, the initial value, a, is equal to P, and the ratio, r, is equal to (1+x/C). If we compound C times per year, it's simply P(1+x/C)ⁿ. In that case, we just have to compute the interest per compounding period. Of course, we typically quote the interest rate as a yearly figure, but compound more often than that. It becomes P(1+x)² after 2 months, P(1+x)³, and in general, after n months it is P(1+x)ⁿ. The "1" is from the original amount and the "+x" accounts for the additional amount due to the interest from previous months. So if you start with a principle of P, at an interest rate of x (phrased as a plain number, not a percent - 3% is x=0.03), the amount grows to P(1+x) after one month. It's actually really simple, despite how they make it appear!Ĭompound interest means nothing more than the fact that the interest of each month is calculated based on the outstanding balance at that month, rather than at the begining.
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