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  • Compound Interest Proof2

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    LUCAS
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    This document proves the compound interest formula through examples showing the calculation of interest over 1, 2, and 3 years. It starts with the simple interest formula and shows that after 1 year the balance equals the principal times 1 plus the interest rate. It then shows that after 2 and 3 years, the balance can be written as the principal times 1 plus the interest rate to the power of the number of years, establishing the general compound interest formula of A = P(1+r)^t, where A is the balance, P is the principal, r is the interest rate, and t is the number of years.

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    compound interest proof

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    This document proves the compound interest formula through examples showing the calculation of interest over 1, 2, and 3 years. It starts with the simple interest formula and shows that after 1 year the balance equals the principal times 1 plus the interest rate. It then shows that after 2 and 3 years, the balance can be written as the principal times 1 plus the interest rate to the power of the number of years, establishing the general compound interest formula of A = P(1+r)^t, where A is the balance, P is the principal, r is the interest rate, and t is the number of years.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    23 views1 page

    Compound Interest Proof2

    Uploaded by

    LUCAS
    This document proves the compound interest formula through examples showing the calculation of interest over 1, 2, and 3 years. It starts with the simple interest formula and shows that after 1 year the balance equals the principal times 1 plus the interest rate. It then shows that after 2 and 3 years, the balance can be written as the principal times 1 plus the interest rate to the power of the number of years, establishing the general compound interest formula of A = P(1+r)^t, where A is the balance, P is the principal, r is the interest rate, and t is the number of years.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 1

    Compound Interest Formula - Proof

    I = Prt
    Simple Interest:
    I = P ⋅ r ⋅1 using t = 1 year

    Time Balance = Principal + Interest

    0 years: A = P
    N
    ↓
    Principal
    Interest
    
    P
    A = P + P⋅ r⋅1
    1 year: A = 1P + P r
    A = P (1 + r ) ← factored
    

    Interest
     
    Principal P  P t
    r P
      
    A = P (1 + r ) + P (1 + r ) ⋅ r ⋅ 1
    2 years: A = P ( 1 + r ) [1 + r ] ← factored
    A = P (1 + r )
    2
    ← simplified
    

    Interest
     
    Principal P
        P t
    r P
    A = P (1 + r ) + P (1 + r ) ⋅ r ⋅ 1
    2 2

    3 years: A = P (1 + r )
    2
    [1 + r ] ← factored
    A = P (1 + r )
    3
    ← simplified

    In General
    A = P (1 + r )
    t
    After t years: (Compounded Yearly)

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