Calculating Compound Interest: 8000 for 2 years at 12 1/2 per annum compounded annually
This article will guide you through calculating the compound interest earned on a principal amount of 8000 for a period of 2 years at an annual interest rate of 12 1/2%.
Understanding Compound Interest
Compound interest is a powerful tool for growing your savings. It means earning interest not only on your initial principal but also on the accumulated interest from previous periods. This creates a snowball effect, accelerating the growth of your investment.
Calculating the Interest Rate
The interest rate is given as 12 1/2%, which translates to 12.5% in decimal form.
Formula for Compound Interest
The formula for calculating compound interest is:
A = P (1 + r/n)^(nt)
Where:
- A is the amount after time t
- P is the principal amount
- r is the annual interest rate (in decimal)
- n is the number of times that interest is compounded per year
- t is the time in years
Applying the Formula
In this case:
- P = 8000
- r = 0.125
- n = 1 (compounded annually)
- t = 2
Substituting these values into the formula, we get:
A = 8000 (1 + 0.125/1)^(1*2)
A = 8000 (1.125)^2
A = 8000 * 1.265625
A = 10125
Calculating the Interest Earned
The interest earned is the difference between the final amount and the principal amount:
Interest = A - P
Interest = 10125 - 8000
Interest = 2125
Conclusion
Therefore, after 2 years, you will have a total amount of 10125, with an interest earned of 2125 on a principal amount of 8000 at an annual interest rate of 12.5% compounded annually.
