Unformatted text preview: ons advertise compound interest
returns at a rate of x percent, or x percent interest, compounded annually, semiannually, quarterly, monthly, weekly, daily, or even continuously. The concept of
future value with annual compounding can be illustrated by a simple example.
If Fred Moreno places $100 in a savings account paying 8% interest compounded annually, at the end of 1 year he will have $108 in the account—the initial principal of $100 plus 8% ($8) in interest. The future value at the end of the
first year is calculated by using Equation 4.1:
Future value at end of year 1 $100 (1 0.08) $108 (4.1) If Fred were to leave this money in the account for another year, he would be
paid interest at the rate of 8% on the new principal of $108. At the end of this
second year there would be $116.64 in the account. This amount would represent
the principal at the beginning of year 2 ($108) plus 8% of the $108 ($8.64) in
interest. The future value at the end of the second year is calculated by using
Future value at en...
View Full Document