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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! ;)

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