compound interest?

Question

Usually compound interest is calculated as below
CI=p(1+r/100)^n
where p is the principal amt, r is the rate of interest and n the no. of years.
If I am supposed to invest 10000 for 3 years will the interest be compounded every year OR
the interest for every month will be compounded

If it is for every month how to calculate n

Answer 1

Compound interest is paid on the original principal and on the accumulated past interest.


Formula:



P is the principal (the initial amount you borrow or deposit)

r is the annual rate of interest (percentage)

n is the number of years the amount is deposited or borrowed for.

A is the amount of money accumulated after n years, including interest.

When the interest is compounded once a year:

A = P(1 + r)n

However, if you borrow for 5 years the formula will look like:

A = P(1 + r)5
This formula applies to both money invested and money borrowed.

Frequent Compounding of Interest:

What if interest is paid more frequently?
Here are a few examples of the formula:

Annually = P × (1 + r) = (annual compounding)

Quarterly = P (1 + r/4)4 = (quarterly compounding)

Monthly = P (1 + r/12)12 = (monthly compounding)

Answer 2

Day counting and compounding are actually much more complicated processes than they should be -- because lots of "shortcuts" were taken in the days before computers & they are still around.

If you are investing in bonds, then there are two compounding periods per year. If you happen to buy one on a day when the compounding starts, then there will be six compounding periods in three years. Suppose you get in at 6%. Then you get 3% per period, so at the ensd of three years you have:

$10,000*(1.03)^6 = $11,940.52

But suppose you put your money in a CD that pays 6%. CDs use what is called Actual/360 day counting. That is, they cmopound every day -- but use 360 for the number pf periods per year in figuring out the daily rate. Yes -- you are right -- this doesn't make sense. Here is the formula for three years.

$10,000*(1+6%/360)^1096 = $12,003.96

You might be wondering where the 1096 comes from. It is the number of days in the next three years (assuming one of them is a leap year).

There are also investments that compound quarterly and monthly. For those, divide the yield by four or 12 to get the periodic yield. Multiply the number of periods per year by thhree to get the number of periods in three years.

Answer 3

there is nothing to think of here. the bank or brokerage will tell you when the compounding period is. For true money market funds it is daily so interest accrues daily. If buying govt bonds there is no compounding at all as interest is sent to you (or "earned" if TBill). If monthly n/12, if daily n/365 but not a valuable exercise either way.

Answer 4

i dont know where you are going to invest and whether it would compounded or not... but if it is every month and the interest rate is per 100 per month then simply replace n by 36. otherwise convert the annual interest rate into monthly interest rate