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Interest and Exponential Growth
(Math | General | Interest and Exponential Growth)

The Compound Interest Equation

P = C (1 + r/n) nt
    P = future value
    C = initial deposit
    r = interest rate (expressed as a fraction: eg. 0.06)
    n = # of times per year interest is compounded
    t = number of years invested

Simplified Compound Interest Equation

When interest is only compounded once per year (n=1), the equation simplifies to:
P = C (1 + r) t

Continuous Compound Interest

When interest is compounded continually (i.e. n --> ), the compound interest equation takes the form:
P = C e rt

Demonstration of Various Compounding

The following table shows the final principal (P), after t = 1 year, of an account initially with C = $10000, at 6% interest rate, with the given compounding (n). As is shown, the method of compounding has little effect.
n P
1 (yearly) $ 10600.00
2 (semiannually) $ 10609.00
4 (quarterly) $ 10613.64
12 (monthly) $ 10616.78
52 (weekly) $ 10618.00
365 (daily) $ 10618.31
continuous $ 10618.37

Loan Balance

Situation: A person initially borrows an amount A and in return agrees to make n repayments per year, each of an amount P. While the person is repaying the loan, interest is accumulating at an annual percentage rate of r, and this interest is compounded n times a year (along with each payment). Therefore, the person must continue paying these installments of amount P until the original amount and any accumulated interest is repaid. This equation gives the amount B that the person still needs to repay after t years.
B = A (1 + r/n)NT - P (1 + r/n)NT - 1
(1 + r/n) - 1
B = balance after t years
A = amount borrowed
n = number of payments per year
P = amount paid per payment
r = annual percentage rate (APR)


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