How is compound interest calculated?

The formula for calculating compound interest is expressed as A = P(1 + r/n)^(nt). In this equation:

• A represents the total amount of money accumulated after n years, including interest.

• P is the principal amount (the initial amount of money).

• r is the annual interest rate (in decimal form).

• n is the number of times that interest is compounded per year.

• t represents the number of years the money is invested or borrowed.

This formula accounts for interest being added to the principal multiple times per year, which results in "interest on interest." By compounding the interest at intervals (n) over a specified timeframe (t), the total amount grows more rapidly compared to simple interest, which only calculates interest on the original principal.

The other options do not accurately reflect the process of compound interest:

• Simple interest, which is dependent on the principal alone and does not take into account the compounding effect, is summarized in the second option.

• The third option also represents a form of simple interest without compounding, as it does not include the division of the interest rate or the compounding factor.

• The last option utilizes a completely different calculation that focuses more on distributing interest elements rather than calculating total accumulated amounts