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The Formula to Calculate a Maturity for a Compound Interest

Original post by Stephanie Ellen of Demand Media

Savings accounts are one type of investment that usually accrue compound interest.

When investing a lump sum of money, interest is usually compounded. That means that when your investment earns interest, the dollar amount is added to the investment, and then any future interest is paid on that new lump sum of the original investment plus interest. Calculating the investment's future maturity depends upon several factors.

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Compound Interest Formula

The compound interest formula is A = P A = P (1+r/n)^nt. A is the future maturity value, P is the investment's present value, r is the investment's interest rate, t is how many years until maturity, and n represents the number of times a year the interest is compounded. You can apply the formula to any investment that accrues compound interest.

Interest on Interest

Compound interest works to your advantage because unlike simple interest, which is paid on the capital only, compound interest pays interest on interest. For example, if you invest $1,000 and earn 5 percent interest per quarter, your investment will be worth $1,000 plus 5 percent interest. That means it will be worth $1,050 at the end of the first quarter, and then $1,050 plus 5 percent interest to total $1,102.50 at the end of the second quarter.

Key Information

In order to calculate an investment's maturity value, apply the formula using information you have garnered from your financial institution and financial documents. For example, in order to use the formula you'll need to know how many times the interest compounded -- each year. This information should be available in your investment's paperwork.

Rule of 72

The rule of 72 tells you how many years it will take you to double your money if your investment is earning compound interest. The rule states that if you divide 72 by the interest rate, that will equal the number of years you will have to invest that money to double it. For example, if you invest in savings at a 3 percent interest rate, then it will take 72 / 3, or 24 years to double your money.


                   

References

About the Author

Stephanie Ellen teaches mathematics and statistics at the university and college level. She coauthored a statistics textbook published by Houghton-Mifflin. She has been writing professionally since 2008. Ellen holds a Bachelor of Science in health science from State University New York, a master's degree in math education from Jacksonville University and a Master of Arts in creative writing from National University.

Photo Credits

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