Compound Interest
A
written for 1 month at 1/2 % (6% ÷ 12). At the end of the first month the balance of the account is 1,005.00 (5 is 1/2 % of 1,000).
The second month, the same process takes place on the new balance of 1,005.00. The amount of interest paid at the end of the second month is 1/2 % of 1,005.00, or 5.03. The compounding process continues for the third, fourth, and fifth months. The intermediate results in this illustration are rounded to dollars and cents.
Figure 3 Annual interest compounded monthly
The word compound in compound interest comes from the idea that interest previously earned or owed is added to the principal. Thus, it can earn more interest. The financial calculation capabilities of the HP 10bII+ are based on compound interest.
Interest Rates
When you approach a financial problem, it is important to recognize that the interest rate or rate of return can be described in at least three different ways:
Picturing Financial Problems 57