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015.d81
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compound interes
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2022-08-26
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COMPOUND INTEREST
When an amount is invested at a
compound interest rate, the interest
for each period, instead of being paid
when due, is added to and becomes part
of the principal. Hence, the interest
for each period is computed on a
principal which increases
periodically.
When interest is added to the
principal at the end of each period,
it is said to be CONVERTED into
principal, or COMPOUNDED.
As an example, suppose that a
principal of $1000 is invested at 12%
(per year), compounded monthly. A
period is one month, and the interest
rate per period is then 1% per month.
A month-by-month view of how the
principal grows follows:
MONTH PRINCIPAL INTEREST PRINC+INT
1 $1000.00 $10.00 $1010.00
2 $1010.00 $10.10 $1020.10
3 $1020.10 $10.20 $1030.30
4 $1030.30 $10.30 $1040.60
5 $1040.60 $10.41 $1051.01
6 $1051.01 $10.51 $1061.52
and so on...
The formula for the compound amount
of an initial amount P, with interest
rate PER PERIOD i, for n periods, is
n
S = P(1+i) .
On your C-64, this becomes
S = P*(1+i)^n.
To see that the formula above is
correct, try to follow the following
argument.
You invest amount P at i% per month
(for example an APR of 12% would be 1%
per month).
At the end of the first month, when
the amount of interest is computed,
the principal P is iP. Thus, the
principal on which the next month's
interest is computed is P+iP, or
factoring out P, it is P(1+i).
At the end of the second month the
interest is i percent of P(1+i), or
iP(1+i). The principal for next month
is then the sum P(1+i) + iP(1+i). By
factoring out P(1+i) from both terms,
we get P(1+i)(1+i) which is equal to
2
P(1+i) .
Continuing in this manner it is easy
to see that the amount at the end of n
months is
n
S=P(1+i) .
As an example, use your C-64 to
verify that the amount that you would
have in your account at the end of
seven years (84 months) at 10% APR
compounded monthly on an initial
investment of $1000 is $2007.
To do that, try entering the
following line the next time you turn
on your computer:
PRINT 1000*(1+.10/12)^84
This calculation allows the
following observation: Money doubles
in seven years at 10% compounded
monthly.
Next verify for yourself that money
triples at 12% compounded monthly in
ten years.
If you want to run the LOADSTAR
\oad"amortization",8
AMORTIZATION PROGRAM now, press "\".
----< continued in next article >-----