

Subject:
How much interest will I accumulate?
Category: Business and Money > Finance Asked by: 2dreamga List Price: $10.00 
Posted:
17 Jul 2004 11:32 PDT
Expires: 16 Aug 2004 11:32 PDT Question ID: 375439 
I have 380,000 in my bank account. The interest rate in the account is 5%. How much interest will I accumulate if interest is compounded annually over the next five years? How much interst will I earn in my account over the next five years with continuous compounding? 

Subject:
Re: How much interest will I accumulate?
Answered By: paul_b_18ga on 17 Jul 2004 12:00 PDT 
Hi, 1. The formula for calculating your interest earnings using anually compounding is: (start amount x (interest rate^periods))  start amount This results in: 380,000 x 1,05^5 = 484,986.99375  380,000 = 104,986.99375 2. The formula for calculating your interest earnings using continuous compounding is: (e^(interest rate as a decimal value x periods) x start amount)  start amount (where e is about 2.7182) This results in: (2.7182^(0.05 x 5) x 380,000)  380,000 = 107,925.98626231281594840532970042 I hope you have enough information. If you any more, please ask for a clarification! Thank you, paul_b_18 

Subject:
Re: How much interest will I accumulate?
From: grthumongousga on 17 Jul 2004 15:55 PDT 
Sorry to intrude on another's question but I have never heard the term "continuous compounding". I am familiar with "compounded daily" (sigh) in terms of credit card interest calculations. If "continous" is completely different than "daily", as in very different amounts, then please confirm with an explicit caveat so we are all perfectly clear. 
Subject:
Re: How much interest will I accumulate?
From: selloutga on 19 Jul 2004 01:11 PDT 
Continuous compounding has the same mathematical basis as daily compounding. However, daily compounding happens 365 times a year, whereas continuous compounding happens 'infinite' times per year. So, continuous compounding is basically the same as daily compounding, only it happens more often. I have never personally seen continuous compounding actually used in real life, but is introduced as theory in a lot of calculus and algebra textbooks. The actual monetary difference between daily interest and continuous interest is surprisingly small. For example, $1000 @ 6% nominal invested for 1 year compounded daily ends up being $1061.831311. Same investment compounded continuously: $1061.836547. 
Subject:
Re: How much interest will I accumulate?
From: grthumongousga on 19 Jul 2004 06:20 PDT 
Sellout, thanks for the explanation. I was concerned there might be a scam. 
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