Understanding Compound Interest

Compound interest is one of the most popular forms of interest calculation, especially in investments and loans. Unlike simple interest, compound interest is calculated on the accumulated amount (principal + interest), which results in exponential growth over time.

Compound Interest Formula

Where:

• M: Final amount (principal + interest)
• C: Initial principal
• i: Interest rate (in decimal, for example, 5% = 0.05)
• t: Time (in periods, such as months or years)

How to Calculate Compound Interest

To calculate the amount using the formula, follow these steps:

1. Convert the interest rate to decimal (if it's in percentage).
2. Add 1 to the interest rate (1 + i).
3. Raise the result to the power of time (t).
4. Multiply the initial principal (C) by the value obtained in the previous step.

The value obtained will be the final amount. If you want to know just the interest generated, subtract the initial principal (C) from the final amount (M).

Practical Example

Suppose you invest $1,000.00 at an interest rate of 5% per month for 12 months:

The final amount will be approximately $1,795.86, and the interest generated will be $795.86 ($1,795.86 - $1,000.00).