Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
What does the formula developed for calculating
Expert Solution
Step 1
Answer:
Compound interest is nothing but interest earned on interest. In case of simple interest only interest gained on the principal sum is taken while in case of compound interest, interest on both principal amount and the interest earned are considered.
Step 2
To calculate the compound interest, we should multiply the initial amount of principal with one plus nominal interest rate to the number of years compounding. The below formula is used to calculate compound interest.
Where, ‘A’ is total amount received after n years,
‘P’ is principal value,
‘r’ is interest rate per year,
‘n’ is number of years
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