A Study Of 'compound Interest'. What It Is, How It Works, And What Advantages And Disadvantages It Has.

1108 words - 4 pages

Compound Interest- What is Compound Interest?- How does it work?- Different Formulas- At are the advantages and disadvantages of Compound Interest?- What does Compound Interest mean to me?- What does it mean for the world?Compound interest is a smart and easy way to get rich. Although it takes a long time, the outcome is rewarding. The dictionary describes defines compound interest as: "Interest paid both on principal and on interest earned during previous compounding periods. Essentially, compounding involves adding interest to the sum of principal and any previous interest in order to calculate interest in the next period". To me, compound interest is pretty much the way one amount of money receives interest (interest is a small percentage of an amount of money that you deposit into a bank, and for keeping your money in the bank, they pay you interest. Interest is usually anywhere between 0.1-30%. The average is about 1.5-6 % interest a year.), and then after a year receives the same percentage of interest but on the already accumulated amount of money. (the amount that has already gotten interest added on the year before). This goes on until the money is taken out, or the interest rate is changed, or any other disruptions change the banks systems. Bank breaks down etc.Compound Interest works in a fairly simply and very systematic way. Lets say Bob puts $100.00 in the bank. The interest rate is 4% a year.(4% of the $100) After one year, Bob looks back at his amount of money, and suddenly he has $104.00. This is because after one year he has collected his interest. Because his interest rate was 4%, he collects 4% of his original $100. 4% of $100.00 is 4, because [4/100= 0.04, 100%= 4(amount/total*100%)] That is an easy formula for finding a percentage of something. Therefore, his interest amount ($4.00) was just added to his original amount ($100.00) resulting in a sum of $104.00! This is when compound interest all starts. At the end of year 2, our Bob looks back at his increasing bank account, to find that he now had a sum of $108.16! He was amazed! Bob had expected to look back and find a simple $108.00, but he now had $0.16 more than he had expected. This was because Bob thought that he would continue receiving interest on the original $100.00, which would result in an addition of $4.00 every year. This was of course not compound interest. What really happened was that Bob had collected 4% interest on the $104.00 instead of the original sum $100.00. This resulted in an additional $0.16 to the first interest income of $4.00. This compounding continued and the amount continued to increase. After 11 years, Bob had a collected amount of $153.95!!! He was mystified!There are many some simple and some not so simple formulas connected together with compound interest. These formulas make it a lot quicker and easier to find out what the future value of an amount that will be compound interested will be. The most important or at least probably the most...

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