How To Calculate Compound Interest

Hi, my name is Grant Hobson. I am working as a financial analyst. Today, I am going to talk to you about some business market calculations and ratios.

How to calculate compound interest. Compound interest is the money made from principal investment and the interest on the principal. We so reinvest the interest on investment and over time, you make made money using compound interest than simple interest rate and we are just demonstrating some calculations on it.

To compare the compound interest than simple interest, how it generates more money, to calculate simple interest first, take the formula M=p(1+(r/n))power ni, where M is final amount including the principal. P is principal amount. I is the rate of interest per year.

n is the number of years invested. If you take in this example, you invest 2500 pounds for 5 years at a rate of 5.8%, I calculate the simple interest, we get 3506 pounds and the 1058 pounds is the interest.

Now, we compare to the compound interest using the same figures. The formula for compound interest is A=p (1+(r/n)) power so the additions in this formula are where n is the number of times the interest is compounded per year. It might be compounded monthly, quarterly or daily.

In this example, I am going to invest 2500 pounds for 5 years at the same rate of 5.8% compounded quarterly. If you look down here in this section, is the formula, the (1+(r/n)) power nt yields 1014.

5 pounds with the investment 2500 generates 3532 pounds. So in this formula, we have taken into account n multiplied by t. So the number of times the interest is compounded per year is multiplied with the number of years.

You see the difference between these two as 26 pounds. .