Learn the basic of Compounding interest.

UNDERSTANDING COMPOUND INTEREST!

Let me bore you guys in my mathematical analysis of compounding interest. If you want to invest in any wallet or in any bank. Compounding is the most recommended and I think the smartest way to put your money with. So how do we earn money by compounding?

Before we go to the compounding interest I want to discuss first the basic example of Simple Interest because it is the basic foundation of compounding interest and to discuss as well the difference between the two.

Supposed P= Principal, I=Interest and r=the interest rate and n=number of years

Determining the Simple Interest

Simple interest simply is the Principal multiplied by the interest rate at a given time.

Interest = I=Pr eq.1

Determining the Future Value of your Capital; Supposed Future Value = FV

The future value of your capital will be the principal plus the interest rate.

FV= P + I or,

FV =P +Pr or simply FV = P(1+r) eq.2

For example, you invest your 1000$ in a simple interest of 10% in a year how much is your money after a year? By using eq.1,

FV = 1000$(1+.10) = 1100$ so your money after a year will be 1100$.

How about if you left your 1000$ in the bank for 5 years with a simple interest of 10%?

Let FV = P + I(n) ,

FV = P + Prn

FV = P (1 +rn)

FV = 1000$ (1+.1(5))= 1500$ so your money will be 1500$ only after 5 years, meanwhile if you invested it on compounding it will grow more than that in 5 years!

Let me discuss further,

Compounding typically refers to the increased in asset by the interest earned from the interest from both the principal and accumulated interest. Let me elaborate this in an equation;

If we will determine the future value of your principal compounding annually, we will have;

FV = P(1+r)n which was derived like this,

Future Value for the first year,

FV1st year= P(1+r)

FV for the second year,

FV2=Fv1(1+r)

FV2= P (1+r) x (1+r) where algebraically if we simplify this form will be, P(1+rn)^2 or if we want to this at the third year it will appear as P(1+r)^3 or if you still want to know for whatever year you want we can put this as nth year so simplifying this into

FV= P(1+r)^n eq.3

For example, you want to determine the future value of your 1000$ with a compounding interest of 10% annually after 5 years.

FV = 1000((1+.1)^5) = 1610.51$

If you are still confused, let me put it like this,

Notes if the interest rate is compounding monthly n is equivalent to monthly! if the interest rate is compounding annually and you want to determine the future value daily or monthly that is a different topic and we can discuss it next if you want! Do you want anyway?

Thank you for reading.

Ps. This is based from what I have remembered during my college days! :) I decided to share this because, I am computing the the interest that I will get from Nexo daily or yearly! Using apy I'll soon show you how it is computed! ;)