Your profit will be $6,288.95 if you took out a student loan in college and now have to pay $800 every year for 10 years, starting one year from now. The annual interest rate on the loan is 3%.
Firstly let’s determine what values are given, and what we need to find. We know that you are going to invest $800this is your initial balance P, and the number of years you are going to invest money is 10. Moreover, the interest rate r is equal to 3%, and the interest is compounded on a yearly basis, so the m in the compound interest formula is equal to 1.
We want to calculate the amount of money you will receive from this investment, that is, we want to find the future value FV of your investment.
FV = 10,000 * (1 + 0.03/1) ^ (10*1) = 10,000 * 1.628895 = 16,288.95
The value of your investment after 10 years will be $16,288.95.
Your profit will be FV - P. It is $16,288.95 - $10,000.00 = $6,288.95.
Note that when doing calculations you must be very careful with your rounding.
You shouldn't do too much until the very end. Otherwise, your answer may be incorrect.
The accuracy is dependent on the values you are computing. For standard calculations, six digits after the decimal point should be enough.
What is compound interest ?
- Compound interest is when you receive interest on both your interest income and your savings.
- Let's imagine you invest $1,000 (your principal) and it earns 5% once a year in interest or profits (the compounding frequency).
To learn more about Compound interest visit:
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