Answer to Question #160067 in Algebra for ....

Question

In your own words and using visuals, explain the following. Regarding compound interest, how does the number of times interest is compounded per year affect the:

a) number of compounding periods (n)

b) interest rate per compounding period (i) 

Answer 1

Compound interest is the interest that accrues from either a loan or a deposit made. It will be affected by the initial principal and the accumulated interest from previous periods. This is interest on interest, which makes a sum grow at a faster rate when compared to simple interest.

(a). Compound Periods (n)

When calculating compound interest, the number of compounding periods makes a significant difference in that the basic rule is that the higher the number of compounding periods, the greater the amount of compound interest.

(b). Interest rate per compounding periods (I)

This affects the interest rate compounded annually. This will mean that that the interest rate will be compounded once per year. For example, if the interest rate is compounded once per year. Examples if the interest rate is compounded four times a year.

Let say the interest rate is compounded monthly then it means the interest rate is compounded 12 times a year.