Compound interest
Each period adds interest to the balance, and the next period pays interest on that new balance. Level: standard.
Learning goals
- Watch a balance grow year by year.
- Read A = P (1 + r)^n.
- See that later years add more than the first year.
Simulation
The rate is 5 percent once a year. Fees and taxes are left out.
Formulas
- Balance. A = P (1 + r)^n
- One period. A = P (1 + r)
Worked example: P = 1000, r = 0.05, n = 8. Balance 1477.46.
Quiz
Answers
- Interest paid on earlier interest is called what? Answer: Compound interest.
- In this demo, n counts what? Answer: Years.
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