Compound Interest Formula

Compound Interest Formula

To start, lets say you have $1000 you want

to put into a bank. While your money is in

the bank you don't want to just sit there, you

want the money to grow!

You have to options...

Bank 1 pays a 12% interest rate compounded monthly

Bank 2 pays a 10% interest rate compounded continuously

To find the future value of your deposit for bank one, you first need to understand the compound interest formula.....

A=P(1+r/n)^nt

But lets look at this formula a little more closely

A= Future Value

P=Initial value invested

(in this case 1000)

T=Time

N=Number of compounds

R=Interest Rate

Now that you understand the formula, lets find out which bank will yield a higher future value in 5 years!

Bank 1

12% Interest rate compounded monthly

Future Value=1000(1+.12/12)^12*5

Bank 1 will yield a future value of $1816.70

Bank 2 earns 10% interest and is compounded continuously...

so instead we use the formula

A=Pe^rt

A= 1000(e)^10*5

A=$1648.72

Bank 1!!!!

Pictures

http://studiomartone.com/wp-content/uploads/2013/09/vault-door-front.jpg

http://www.utahmoneycenter.com/wp-content/uploads/2013/05/Fundraising.jpg

http://doggydeals.com/wp-content/uploads/2012/10/ConfusedDog.png

http://www.studiesweekly.com/content/what-is-the-debt-ceiling

Which bank will you put your money in if you

were to leave it for 5 years?