Question

How much interest will be earned in the next year on an investment paying 12% compounded annually if $100 was just credited to the account for interest?

Answer 1

Compound interest is the addition of interest to the principal sum for the next calculation of interest, so the interest is accumulated.

Formula for compound interest calculation:

$\text{Interest} = P(1 + \dfrac{r}{100})^n - P\\\\\text{where P is the principal amount, r, the interest rate and n, the number of periods}$

Given:

Principal Amount = $100

Interest Rate = 12% p.a.

Find the interest that will be earned in 1 year:

$\text{Interest} = P(1 + \dfrac{r}{100})^n - P$

$\text{Interest} = 100(1 + \dfrac{12}{100})^1 - 100$

$\text{Interest} = 100(1.12) - 100$

$\text{Interest} = 112 - 100$

$\text{Interest} = \ \:12$

Answer: The interest will be $ 12.