How Does One Calculate Compound Interest?


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Aun Jafery answered
Compound interest is where the interest amount of the first period gets added to the principal and interest is recalculated for the entire amount. This process is repeated at the end of the second period and so forth. When money is placed in the bank it is usually compounded yearly, certain investment schemes compound interest half yearly or quarterly, while credit card companies may compound interest as frequently as daily.

Let's consider that a hundred pounds is borrowed at an interest rate of ten percent per annum for five years. The entire loan amount will be paid back at the end of the five year period. The interest of the first year works out to around ten pounds. For the second year compound interest will now be calculated on a hundred and ten pounds and not the original amount. Formula for calculating Compound interest is FV=PV(1+I)ⁿ. Here (FV) stands for future value, (PV) stands for the investment, interest rate is represented as (I) and period as n.

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