![]() Using the data provided in the compound interest table, you can calculate the final balance of your investment. ![]() Let's try to plug these numbers into the basic compound interest formula: This time, we need to compute the interest rate r r r. The time horizon of the investment is 6 6 6 years, and the frequency of the computing is 1 1 1. Assuming that the painting is viewed as an investment, what annual rate did you earn?įirstly, let's determine the given values. Six years later, you sold this painting for $3,000. You bought an original painting for $2,000. This type of calculation may be applied in a situation where you want to determine the rate earned when buying and selling an asset (e.g., property) that you are using as an investment. In this example, we will consider a situation in which we know the initial balance, final balance, number of years, and compounding frequency, but we are asked to calculate the interest rate. This time, some basic algebra transformations will be required. Now, let's try a different type of question that can be answered using the compound interest formula. Thus, in this way, you can easily observe the real power of compounding. If you choose a higher than yearly compounding frequency, the diagram will display the resulting extra or additional part of interest gained over yearly compounding by the higher frequency. However, even when the frequency is unusually high, the final value can't rise above a particular limit.Īs the main focus of the calculator is the compounding mechanism, we designed a chart where you can follow the progress of the annual interest balances visually. Note that the greater the compounding frequency is, the greater the final balance.
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