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Compound Interest Proof

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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1K views1 page

Compound Interest Proof

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.

Uploaded by

Black Ink Tutorials & Services
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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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 r1
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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