How to Calculate Compound Interest

What is compound interest and how is it calculated?

1. Principal amount: $1000

2. Annual interest rate: 5%

3. Compounding period: Quarterly

Answer:

To calculate compound interest, you can use the formula:

A = P(1 + r/n)^nt

Where:

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

P is the principal amount (initial investment).

r is the annual interest rate (decimal).

n is the number of times that interest is compounded per year.

t is the number of years.

Compound interest is the interest calculated on both the initial principal and the accumulated interest from previous periods. In this case, the principal amount is $1000, the annual interest rate is 5%, and the compounding period is quarterly (four times a year).

The formula for compound interest takes into account the number of compounding periods per year, which in this example is quarterly. By plugging in the values of the principal amount, interest rate, compounding periods, and time into the formula, you can calculate the total amount of money accumulated after a certain period.

Make sure to use the correct decimal representation for the annual interest rate in the formula to get an accurate calculation of compound interest.