Compound Interest Notes

Computing Compound Interest

Key Concepts

• Compound Interest (I): Interest calculated periodically over the loan's life, added to the principal for subsequent computations.
• Future Value (S): Also known as compound amount, is the final amount of the loan or investment.
• Present Value (P): The original amount of the loan or investment.

Simple vs. Compound Interest

• Compound interest makes the principal grow more compared to simple interest.

Compounding Terms (m)

• $m$ represents the number of compounding periods per year:
  • Annually: $m = 1$
  • Semiannually: $m = 2$
  • Quarterly: $m = 4$
  • Monthly: $m = 12$
  • Daily: $m = 365$

Compound Interest Formula

• $S = P(1 + \frac{r}{m})^{tm}$
  • $S$ = Compound Amount (Future Value)
  • $P$ = Principal (Present Value)
  • $r$ = Annual Interest Rate
  • $m$ = Number of Compounding Periods per Year
  • $t$ = Number of Years

Calculating Interest

• Interest = Future Value - Present Value