Final answer:
The formula for compound interest is Future Value = Principal × (1 + interest rate)^time, and to find the compound interest, you subtract the principal from the future value. This calculates the interest earned on both the initial principal and the interest that has been added to it over time.
Step-by-step explanation:
The formula for compound interest is used to calculate the total amount of interest earned over a certain period when the interest is reinvested and added to the principal amount, rather than being paid out. The standard formula to calculate compound interest is as follows:
Future Value = Principal × (1 + interest rate)time
To find the compound interest itself, you need to subtract the original principal from the future value:
Compound Interest = Future Value - Principal
Where:
- Future Value is the total amount at the end of the investment period.
- Principal is the initial amount of money before interest.
- Interest rate is the rate at which the investment grows each period.
- Time represents the number of periods the money is invested or borrowed for.