Compounding Interest: Confirm my answers?

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In summary, we used the formulas A=P(1+r/n)^nt and P=A(1+r/n)^-nt to find the missing information in four different scenarios. The missing values were A for the first three scenarios and P for the last scenario. The resulting values were approximately 4912, 4306, 2566, and 4395 for the four scenarios, respectively. These calculations were based on the given values of P (or PV), r, t, and c.
  • #1
eleventhxhour
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Find the missing information:

1) P = 3800, r = 8%, t = 39 months, c = quarterly, A = ?
2) P = ?, r = 7.5%, t = 2 years, c = monthly, A = 5,000
3) P = ?, r = 5.2%, t = 3 years, c = weekly, A = 3000
4) P = 3723, r = 6.75%, t = 30 months, c = semi annually, A = ?

My answers were:
1) A = 4912
2) P = 4306
3) P = 2566
4) A = 4395

Can someone confirm that my answers are correct? (you don't have to do all of them, but it would be really helpful! Also it said P or PV and A or FV in the question - I just wrote P and A)
 
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The formula we may begin with is:

\(\displaystyle A=P\left(1+\frac{r}{n}\right)^{nt}\)

the other form we will need is:

\(\displaystyle P=A\left(1+\frac{r}{n}\right)^{-nt}\)

1.) \(\displaystyle A=3800\left(1+\frac{0.08}{4}\right)^{4\cdot3.25}\approx4915.71\)

2.) \(\displaystyle P=5000\left(1+\frac{0.075}{12}\right)^{-12\cdot2}\approx4305.55\)

3.) \(\displaystyle P=3000\left(1+\frac{0.052}{52}\right)^{-52\cdot3}\approx2566.88\)

4.) \(\displaystyle A=3723\left(1+\frac{0.0675}{2}\right)^{2\cdot2.5}\approx4395.12\)
 

FAQ: Compounding Interest: Confirm my answers?

What is compounding interest?

Compounding interest is a method of calculating interest where the interest earned on an investment is added to the principal amount, and then the new total amount earns interest. This results in the interest earned increasing over time as the principal amount grows.

How does compounding frequency affect interest earned?

The compounding frequency refers to how often the interest is calculated and added to the principal amount. The more frequent the compounding, the more interest will be earned over time. For example, compounding interest annually will result in less interest earned compared to compounding interest monthly.

What is the formula for calculating compounding interest?

The formula for calculating compounding interest is A = P (1 + r/n)^(nt), where A is the total amount, P is the principal amount, r is the annual interest rate, n is the number of compounding periods per year, and t is the number of years.

Is compounding interest always beneficial?

In most cases, compounding interest is beneficial as it allows for the potential to earn more interest over time. However, if the interest rate is low or the investment has a short time period, the difference in earned interest may be minimal.

Can compounding interest work against you?

In some cases, compounding interest can work against you if the interest rate is high and the investment is held for a long period of time. This can result in a large amount of interest being added to the principal amount, making it more difficult to pay off or earn a profit from the investment. Additionally, compounding interest can also work against you if you have a loan with compound interest, as the interest will continue to accumulate over time, making it harder to pay off the loan.

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