It is easy to show that this formula works even when
$n$ is a fraction of a year. For example, let us invest the money for 1 month, then for 4 months, then for 7 months.
which is the same as investing the money for a year.
Look carefully at the long equation above. It is not as complicated as it looks! All we are doing is taking the opening amount (
$P$ ), then adding interest for just 1 month. Then we are taking that new balance and adding interest for a further 4 months, and then finally we are taking the new balance after a total of 5 months, and adding interest for 7 more months. Take a look again, and check how easy it really is.
Does the final formula look familiar? Correct - it is the same result as you would get for simply investing
$P$ for one full year. This is exactly what we would expect, because:
1 month + 4 months + 7 months = 12 months, which is a year.
Can you see that? Do not move on until you have understood this point.
The power of compound interest
To see how important this “interest on interest" is, we shall compare the difference in closing balances for money earning simple interest and money earning compound interest. Consider an amount of R10 000 that you have to invest for 10 years, and assume we can earn interest of 9%. How much would that be worth after 10 years?
The closing balance for the money earning simple interest is:
So next time someone talks about the “magic of compound interest", not only will you know what they mean - but you will be able to prove it mathematically yourself!
Again, keep in mind that this is good news and bad news. When you are earning interest on money you have invested, compound interest helps that amount to increase exponentially. But if you have borrowed money, the build up of the amount you owe will grow exponentially too.
Mr Lowe wants to take out a loan of R 350 000.
He does not want to pay back more than R625 000 altogether on the loan. If theinterest rate he is offered is 13%, over what period should he take the loan.
The following two examples show how we can take the formula for compound interest and apply it to real life problems involving compound growth or compound decrease.
South Africa's population is increasing by 2,5% per year. If the current population is 43 million, how many more people will there be in South Africa in two years' time ?
initial value (opening balance),
$P=43\phantom{\rule{3.33333pt}{0ex}}000\phantom{\rule{3.33333pt}{0ex}}000$
period of time,
$n=2\phantom{\rule{3.33333pt}{0ex}}\mathrm{year}$
rate of increase,
$i=2,5\%\phantom{\rule{3.33333pt}{0ex}}\mathrm{per\; year}$
We are required to find the final value (closing balance
$A$ ).
There will be
$45\phantom{\rule{3.33333pt}{0ex}}176\phantom{\rule{3.33333pt}{0ex}}875-43\phantom{\rule{3.33333pt}{0ex}}000\phantom{\rule{3.33333pt}{0ex}}000=2\phantom{\rule{3.33333pt}{0ex}}176\phantom{\rule{3.33333pt}{0ex}}875$ more people in 2 years' time
A swimming pool is being treated for a build-up of algae. Initially,
$50{m}^{2}$ of the pool is covered by algae. With each day of treatment, the algae reduces by 5%. What area is covered by algae after 30 days of treatment ?
An amount of R3 500 is invested in a savings account which pays compound interest at a rate of 7,5% per annum. Calculate the balance accumulated by the end of 2 years.
If the average rate of inflation for the past few years was 7,3% and your water and electricity account is R 1 425 on average, what would you expect to pay in 6 years time ?
Shrek wants to invest some money at 11% per annum compound interest. How much money (to the nearest rand) should he invest if he wants to reach a sum of R 100 000 in five year's time ?
The next section on exchange rates is included for completeness. However, you should know about fluctuating exchange rates and the impact that this has on imports and exports. Fluctuating exchange rates lead to things like increases in the cost of petrol. You can read more about this in
Fluctuating exchange rates .
Questions & Answers
where we get a research paper on Nano chemistry....?
Do u think that Graphene and Fullrene fiber can be used to make Air Plane body structure the lightest and strongest.
Rafiq
Rafiq
what is differents between GO and RGO?
Mahi
what is simplest way to understand the applications of nano robots used to detect the cancer affected cell of human body.?
How this robot is carried to required site of body cell.?
what will be the carrier material and how can be detected that correct delivery of drug is done
Rafiq
Rafiq
if virus is killing to make ARTIFICIAL DNA OF GRAPHENE FOR KILLED THE VIRUS .THIS IS OUR ASSUMPTION
Anam
analytical skills graphene is prepared to kill any type viruses .
Anam
Any one who tell me about Preparation and application of Nanomaterial for drug Delivery
The nanotechnology is as new science, to scale nanometric
brayan
nanotechnology is the study, desing, synthesis, manipulation and application of materials and functional systems through control of matter at nanoscale
Damian
Is there any normative that regulates the use of silver nanoparticles?