4B

Compound Interest Formula

A= P X (1+APR)^Y Where A= Amount P= Principal APR=Annual Percentage Rate (as a decimal!) Y=Years However, if the interest rate is not computed annually, you may see a more general form of the formula that looks like this: A=P X (1+ i)^n Where I= interest rate, and n= number of times it is compounded

Compound interest formula for interest paid more than once a year

A=P (1+APR/N)^NxY

Continuos Compounding formula

A=P X e(APRxY)

Types of compounding

Annual, Quarterly, Monthly, Daily, and Continuous. This is pretty obvious if you look at the formula, in which the amount of years is factored exponentially in the formula.

How does compound interest grow?

Exponentially. While simple interest is added, compounded interest multiplies by itself.

Discounting

How to find the principal deposit needed to generate some future amount. Algebra can be used to solve for problems in which the principal amount is unknown. Simply divide A by (1+ APR/N)^nY to find P. For continuous compounding substitute the denominator with the formula for continuous compounding.

Compound Interest

In which interest is paid on interest as well as the initial principal balance.

Simple Interest

Interest is only paid on actual investment

APY

The actual percentage by which a balance increases in one year. It is equal to the APR if interest is compounded annually. It is greater than the APR if interest is compounded more than once a year. The APY does not depend on the starting principal. The APY is sometimes also called the effective yield or simply the yield.

Continuous Compounding

The best possible compounding for any particular APR. This number would be useful in trying to determine the best possible loan if you know the APR.