Compound Interest Problems: Common Confusions And Sample Problem

Compound Interest Problems: Common Confusions And Sample Problem

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To solve compound interest problems, you must know an essential compound interest formula and that is:

A = P (1+r/n)nt


Now, let me explain to you the corresponding meaning of each variable in the formula used in compound interest problems.

A stands for the total amount of the formula used in compound interest problems. P stands for the principal amount or the first amount that is deposited or borrowed. r stands for the interest rate. r should always be in decimal form. To be able to do this, simply divide the number to 100. n stands for how many times the interest was compounded in a year. t stands for the time period in year/s format.

Common confusions with Compound Interest Problems

Just be advised that the n variable should only contain the times the interest was compounded in a year. It should not have the total times the interest has been compounded. This is also one confusing topic in compound interest problems and as a guide, here are examples: if the interest in one of the compound interest problems is compounded once a year then n should only be 1. If it was compounded twice a year then n is equals to 2. If the interest in one of the compound interest problems is compounded 4 times or quarterly in a year then n should be equals to 4. How about monthly? Then n should be equals to 12 and so on.

Next topic compound interest problems is the variable t. Whether the interest in one of the compound interest problems is compounded once a year or once a month, the variable t should always be in year/s format. But what will we do if the loan or investment only lasts for months and not years? Is this is the case then get the number of months and divide it to 12. 12 is used since this is the total number of months in a year. How about, if the loan or investment will last for a year and 4 months? Again, get the total number of months and divide it by 12 to make the number in year/s format.

Here is One Example of Compound Interest Problems

I will be investing in the bank the cash amount of one thousand dollars. The Interest rate of my investment, given by the bank is 3.5%. The interest in my invested will be four times a year compounded or will have a quarterly interest compound. My investments time period is for 5 years. Now how much will I earn from my investment?

The answer to this example, as one of the many compound interest problems is

one thousand one hundred ninety dollars and thirty four cents.

By using the formula for compound interest problems, you will surely have the same answer as mine. Try it and Goodluck!

About the Author:
More of compound interest formula and compound interest problems, visit William Ava's Blog Site click here.



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