The Investment Formula
An Investment Example
Remember that the investment formula for a principal P, an interest rate i and a term n is [pic].
Example 1: Interest calculated annually
Let us calculate the value of an investment of $100 000 for 30 years at an interest rate of 6% per annum with interest calculated annually. Our investment will be worth [pic]
Example 2: Interest calculated monthly
Let us still calculate the value of an investment of $100 000 for 30 years at an interest rate of 6% per annum but the interest rate is now calculated monthly. The monthly interest is therefore [pic] per month and the total number of time periods n is [pic]. Our investment will now be worth [pic]
Example 3: Interest calculated weekly
Let us still calculate the value of an investment of $100 000 for 30 years at an interest rate of 6% per annum but the interest rate is now calculated weekly. The weekly interest is therefore [pic] and the number of time periods n is [pic]. Our investment will now be worth [pic]
We see that when interest is calculated more frequently, our investment grows to a larger amount at the end of 30 years. Here we see the power of exponents displayed and we experience something of what Einstein spoke about.
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