To understand the compound interest we need to do its Mathematical calculation. To use the compound interest formula you will need figures for principal amount annual interest rate time factor and the number of compound periods. Start with the formula for compound interest shown below.
At the end of the second year you will earn 3 on the 103 beginning balance or 309 ending up with a balance of 10609.
Monthly compounding is calculated by principal amount multiplied by one plus rate of interest divided by a number of periods whole raise to the power of the number of periods and that whole is subtracted from the principal amount which gives the interest amount. He shows that the amount after the end of one year is amount A P 1APRand he goes on and generalizes how to compute it for n years. He starts with explaining the basic concepts like principle which is the amount you borrow and the rate of interest or annual percentage rate APR which is the rate at which you pay the interest up on the borrowed principle. Start with the formula for compound interest shown below.