Compound interest examples

Are you looking for examples of different compound interest rates to understand how they work? If yes, then you are absolutely at the right place. Read this article until the end to get a complete understanding of different compound interest rates, compounding frequency, and suitable examples.

How does compound interest work?

It adds interest to the initial amount deposited and the accumulated amount over the years. This comprises two interest rates one is on the principal amount and the other is on the accumulated interest of the previous periods. Let’s check how it works in depth!

  1. Initial amount: 

You have to start with an investment as the principal amount.

  1. Interest on the principal amount: 

Calculate interest on the principal balance at the end of each compounding period which could be a year, quarter, or month.

  1. Add interest in the initial amount: 

The interest that you have calculated above now adds that to the principal amount and the result will be the mixture of two amounts one is original and the other one is the interest that has been earned till now.

  1. Repeat the process: 

Calculate your interest again on the next compounding frequency that has grown due to the addition of interest from previous ones. 

Examples of compound interest: 

Check out the examples below:

  1. Initial investment with annual compounding: 

Assume you have invested $3000 for two years at a 5% annual interest rate, with the interest compounded just once per year.

  • Initial Investment P= $3000
  • Interest Rate r= 5% or in decimal 0.05
  • Time t= 2 years
  • Compounding Frequency n= 1 annually 
  • n= 1 time per year annually

Formula: A= P×(1+r/n)^n×t

Put the values in the formula: 

A= 3000 (1+0.05/1) ^1×2

A = 3000 × (1 + 0.05) ^ 2

 A = 3000 ×  (1.05) ^ 2

  (1.05) ^ 2 = 1.1025

Now multiply it by the initial amount:

3000 × 1.1025 

A = 3307.5

Results: your investment will be $3307.5 

  1. Savings account monthly compounding: 

Let’s take an example of the savings account monthly compounding, you invest $700 into the savings account with a 6% interest rate and monthly compounding frequency.

  •       P= 700,
  •       r= 0.06
  •       n= 12
  •       t= 1 year

Putting those values in the formula: 

                 A= 700(1+ 0.06/12)^12×1

                 A= 743.19

Result: your investments will grow $743.19 in the monthly compounding frequency.

Final Verdict

To sum up, compound interest examples make it easy for you to clear your understanding regarding various compounding frequency results and their growth. It provides a clear picture of your interest earned, check out the above examples and make your calculations the way they are calculated to get proper results.

Frequently Asked Questions

  1. On what basis the interest is calculated in the initial period?

Interest in the initial period is calculated based on the principal amount.

  1. What is r represented as?

r is represented in the decimal form i.e. 0.09.

  1. What’s the formula to calculate the compound interest?

The formula to calculate compound interest is A= P(1+r/n)^n×t.

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