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Essay / Research Paper Abstract
This 3 page paper shows a student how to calculate compound interest, looking at the traditional approach, with an annual calculation as well as the shorter method using an equation. All calculations are shown. The bibliography cites 1 source.
Page Count:
3 pages (~225 words per page)
File: TS14_TEcompintr.doc
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Unformatted sample text from the term paper:
in 1995, if there is interest paid at a rate of 5.4% net per annum it is possible to assess the return at the end of a five year period.
The process of calculating this is straight forward; we will assume that the interest is paid annually at the end of each year. The first sees us take
the initial amount invested, and multiply it by the net interest rate that will be received, so this is 1,000 x 5.5% = 54
So the interest for the first year is 54. If no money is taken out then the interest of 54 is added to the investment, so by the
start if year 2 (1996) the capital investment is the 1,000 + 54 = 1,054. The interest paid for year 2 will be
based on the amount invested, this is known as compounding as the interested in compounded over the years. As this has increased to 1,054 the calculation for this year will
be 1,054 x 5.4% = 56.92. The interest for 1996 is therefore 56.92, and will be added to the investment, so that at the beginning of
year 3 (1997) the investment amount that is carried forward (continuing with the assumption that there are no withdrawals), is 1,054 + 56.92 = 1,110.92. 1997 (year 3) is
calculated the same way, the investment amount which has been carried forward is 1,110.92 so the calculation is 1,110.92 x 5.4% = 59.99. The amount of interest earned
each year is increasing as not only is there interest on the initial investment, there is also interest being earned on previous years interest, which demonstrates the value of compounding
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