Compound Interest Formula

The compound interest or maturity value on your investments is calculated using the following compound interest formula.

A = P ( 1 +

)^nt

Where,
A = Maturity value (Principal + Interest),
P = Principal or Initial balance,
r = Interest rate (per annum),
n = Number of times interest is compounded per year,
t = Investment time in years.

Now let's take some examples.

Example 1:

Suppose, the present invested value is £3000. Calculate the maturity value after 6 years with an annual interest of 6.2% (compounded yearly).

Solution:

Here,
P = 3000,
r = 6.2% = 6.2/100 = 0.062 (in decimal),
n = 1 (compounded yearly),
t = 6

Now place all the values in the compound interest formula.

A = 3000 × (1 + 0.062/1) ^{(1 × 6)}

A = 3000 × (1.062)⁶

A = 3000 × 1.43465 = £4303.96

So, after 6 years, you will receive £4303.96 on a £3000 investment.

Example 2:

Suppose, the initial investment is £48,000. What will be the future value after 10 years with an annual interest of 4.65% (compounded monthly)?

Solution:

Here,
P = 48000,
r = 4.65% = 4.65/100 = 0.0465 (in decimal),
n = 12 (compounded monthly),
t = 10

Now place all the values in the formula.

A = 48000 × (1 + 0.0465/12) ^{(12 × 10)}

A = 48000 × (1.003875)¹²⁰

A = 48000 × 1.590584 = £76,348.04

So, after 10 years, your £48,000 investment will become £76,348.04.