How to Calculate Annual Compound Interest
- 1). Use the formula. This is the key to figuring out how much interest will be earned or paid annually as well as for the life of the loan or investment. The formula is: M= P (1 + i) ⁿ.
- 2). Enter a value for “P” in the equation first. “P” represents the principal or original amount of your loan or investment. For example, if you borrow fifty thousand dollars, the equation would start like this: M= 50,000 (1 + i) ⁿ.
- 3). Put in a value for “i” in the formula. “i” stands for the interest rate. Assuming the interest rate for your loan is six percent, the equation now looks like this: M= 50,000 (1 + 0.06) ⁿ.
- 4). Assign “ⁿ” a value. This stands for the number of years it will take for your loan or investment to mature. Continuing with the above example, assume the loan is for ten years. Here is the formula now: M= 50,000 (1 + 0.06) 10 .
- 5). Solve the equation. First add “1 + 0.06” to get 1.06. Next multiply 1.06 to the tenth power to get 1.79. Finally multiply 50,000 by 1.79. M=89,500 which means you will pay back $39,500 more than you originally borrowed due to the annually compounding interest. On the other hand, imagine if you had invested the fifty thousand dollars at theses terms as opposed to borrowing it. You would know be almost forty thousand dollars richer.
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