# Savings institutions advertise compound interest

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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 accountâ€”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 Equation 4.2: Future value at en...
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