Compound Interest Calculated Monthly

by Juanita
(USA)

Question
I made a loan of $500.00 with an annual 6% interest rate, which will be compounded monthly. How do I calculate this type of loan?

Answer
STEP 1:
You are required to calculate the amount of interest obtained by monthly compounding. The formula used for finding compound interest is:

compound interest formula

Here, P denotes the principal, r represents the annual interest rate, n is the number of times the interest is compounded per year, and t is the time in years.

STEP 2:
The rate of interest is 6% per year. Before you begin the calculations, you need to express 6% as an equivalent decimal number. This can be achieved by dividing 6 by 100.

convert 6 percent to decimal


STEP 3:
Since the interest is compounded monthly, you can take n as 12. As no time period has been specified, we shall assume that the loan is taken for a period of one year. Now that all the variable values are known, you can directly substitute them in the formula and get the result.

using the compound interest formula

We have determined the loan amount after 1 year by monthly compounding as about $531.00.

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