How Do You Calculate Compound Interest (Finance?
Certain lenders and loans require the borrower to pay compound interest on the loan. Also, most interest bearing deposit accounts, money market accounts, and checking accounts pay you, the depositor, compounded interest for loaning your money to the bank. Simply put, compounding interest is the payment of interest on any deposits made plus any previously earned interest. The basic formula for calculating the future value of a financial asset earning compounding interest is: FV = P(1+r)t FV is the future value of the asset, or the sum of all deposits plus accumulated interest. “P” is the assets principal value, “r” is the rate of return, and “t” is the length of the deposit expressed in years. For example, a principal balance of $10,000, earning (or owing) 5% compounding interest per year over 3 years would be calculated as follows: FV = 10,000(1+.05)3, which means FV = 10000(1.157625) = $11576.25. This is the lump sum paid at the end of the three years. To calculate the accumulated com
