What is the formula of Compound Interest (C.I)?

Compound interest is a method of calculating interest where the interest earned over time is added to the principal amount, allowing future interest calculations to be based on the new total. The formula for calculating compound interest is:

Compound Interest Formula

The formula can be expressed as:

A = P (1 + r/n)^(nt)

Where:

• A = the amount of money accumulated after n years, including interest.
• P = the principal amount (the initial sum of money).
• r = the annual interest rate (decimal).
• n = the number of times that interest is compounded per year.
• t = the number of years the money is invested or borrowed.

Understanding the Components

Each component plays a crucial role in determining how much interest you will earn or owe. The more frequently interest is compounded (higher n), the more interest you will accumulate over time.

Example Calculation

If you invest $1,000 at an annual interest rate of 5%, compounded annually for 3 years, the calculation would look like this:

A = 1000 (1 + 0.05/1)^(1*3) = 1000 (1.05)^3 ≈ 1157.63

This means after 3 years, you would have approximately $1,157.63.