Explain compound interest with two examples of different cases.
Answers
Answer:
Compound interest is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest
Step-by-step explanation:
Let's say your goal is to end up with $10,000 in 5 years, and you can get an 8% interest rate on your savings, compounded monthly. Your calculation would be: P = 10000 / (1 + 0.08/12)(12×5) = $6712.10.
Answer:
Compound interest refers to the phenomenon whereby the interest associated with a bank account, loan, or investment increases exponentially—rather than linearly—over time. The key to understanding the concept is the word “compound”. Suppose you make a $100 investment in a business which pays you a 10% dividend every year. You have the choice of either pocketing those dividend payments as cash, or reinvesting those payments into additional shares. If you choose the second option, reinvesting the dividends and compounding them together with your initial $100 investment, then the returns you generate will start to grow over time.
Example: If an amount of $5,000 is deposited into a savings account at an annual interest rate of 5%, compounded monthly, with additional deposits of $100 per month (made at the end of each month). The value of the investment after 10 years can be calculated as follows... P = 5000.