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Wize University Introduction to Finance Textbook > Time Value of Money

Compound Interest

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Compound Interest

  • Interest on the principal and previous interest payments (interest-on-interest)
  • Most widely used form of interest


Future Value

Total Interest


Interest-on-Interest

  • Interest that is earned on previous interest payments.
  • Increases over time, unlike simple interest.
  • It is the difference between compound interest and simple interest.

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Example: Compound Interest

Today you have $1,000 and will earn 10% interest compounded annually.
  1. How much will you have in your account in 4 years?
  2. How much total interest will you earn in 4 years?
  3. How much interest-on-interest will you earn in 4 years?

Practice: Compound Interest

Mary invested $10,000 and will earn 12% interest compounded annually for 10 years.

Round your final answers to 2 decimal places
Extra Practice
Tina took out a $20,000 pure-discount loan that matures in 7 years. The rate is 6%. How much will she repay at the end of 7 years?
You just borrowed $100,000 and agreed to repay the loan plus interest in 18 months. The loan carries a 5% interest rate compounded weekly.
How much will you repay at maturity?
Round your work to at least 6 decimal places and final answer to 2 decimal places.
You have $3000 and your account earns 12% interest compounded monthly.
You have $1000, and your account earns 10% interest compounded annually. What is the future value in 5 years?
You are indifferent between receiving $2,300 next year or receiving $2,000 right now. This means your opportunity cost is approximately:
Which of the following will increase the future value of an investment, but decrease the present value?
How much should you invest today at 8% APR compounded weekly in order to have $50,000 in 10 years?
Which of the following would have the largest future value if $200 is invested today?
20 years ago you invested money into an account that earned 15% interest compounded annually. Today you have $130,932.30 in this account.