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Lesson 37 · Compound interest
Interest earning interest
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Interest earning interest

Leave the interest IN the account and it starts earning interest of its own: A=P (1+i)nA = P\,(1 + i)^{n} — read aloud: A equals P, times one-plus-i to the n. Each period multiplies the whole balance by 1+i1 + i, and nn periods stack as a power — this is the geometric sequence with r=1+ir = 1 + i, wearing a bank uniform. Compounded monthly? Same formula, smaller gears: ii becomes the yearly rate ÷ 12, and nn counts MONTHS, twelve per year.

Read backwards, the same machine prices the future: PV=FV/(1+i)n\mathit{PV} = \mathit{FV}/(1 + i)^{n} — what a promised amount is worth today. Growing multiplies; discounting divides; there is one formula here, not two. The gap between simple and compound looks like pocket change at year two and is a canyon by year twenty — compounding is patient money's superpower.

PArnt

A=P(1+rn)ntA = P \left( 1 + \frac{r}{n} \right)^{n t}

  • AA= Final amount
  • PP= Principal
  • rr= Interest rate per period (decimal)
  • nn= Compounds per period
  • tt= Number of periods
Compound Interest (Periodic) solver →
PVFVrt

PV=FV(1+r)t\mathit{PV} = \frac{\mathit{FV}}{(1 + r)^{t}}

  • PV\mathit{PV}= Present value
  • FV\mathit{FV}= Future value
  • rr= Discount rate per period (decimal)
  • tt= Number of periods
Present Value solver →