A:

When calculating interest-on-interest, use the compound interest formula to determine the amount of accumulated interest on the principal amount invested or borrowed. To figure out compound interest on a loan or deposit, you need to know the principal amount, the annual interest rate and the number of compounding periods.

Compound interest is the interest owed or received that grows at a faster rate than basic interest.

## How to Calculate Interest on Interest (Compound Interest)

The formula to calculate compound interest is the principal amount multiplied by 1, plus the annual interest rate in percentage terms, raised to the total number of compound periods. The principal amount is then subtracted from the resulting value.

Compound Interest = [P (1 + i)n] – P

(Where P = Principal, i = nominal annual interest rate in percentage terms, and n = number of compounding periods.)

For example, assume you want to calculate the compound interest on a \$1 million deposit. The principal is compounded annually at a rate of 5%. The total number of compounding periods is five years.

The resulting compounded interest on the deposit is \$276,281.60, or \$1,000,000 * (1 + 0.05) ^ 5 - \$1,000,000.

Assume you want to calculate the compound interest on a \$1 million deposit. However, this particular deposit is compounded monthly. The annual interest rate is 5%, and the interest accrues at a compounding rate for five years.

To calculate the monthly interest, simply divide the annual interest rate by 12 months. The resulting monthly interest rate is 0.417%. The total number of periods is calculated by multiplying the amount of years by 12 months, since the interest is compounding at a monthly rate. In this case, the total number of periods is 60, or 5 years * 12 months.

The resulting interest, compounded monthly, is \$283,614.31, or (\$1,000,000)*(1+0.00417) ^ 60 - \$1,000,000.

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The passage provides an explanation of compound interest and how to calculate it using a formula. It also includes two examples of calculating compound interest on a \$1 million deposit, one compounded annually and the other compounded monthly.

Content Structure:
- Explanation of compound interest and the formula to calculate it
- Example 1: Calculating compound interest on a \$1 million deposit compounded annually
- Example 2: Calculating compound interest on a \$1 million deposit compounded monthly

Analysis:
single_question_with_answer

the passage contains a mathematical question (how to calculate compound interest) and provides answers to that question through the formula and two examples.
Given a text passage, determine:
    1. If it contains a mathematical question (including word problems or calculations)
    2. If an answer to that mathematical question is provided in the text

First, describe the content structure you found in 1-2 sentences.

Then provide your analysis in the following format:
TYPE: <one of the following values>
- NO_QUESTION
- SINGLE_QUESTION
- SINGLE_QUESTION_WITH_ANSWER
- MULTIPLE_QUESTIONS
- MULTIPLE_QUESTIONS_WITH_ANSWERS
system
A:

When calculating interest-on-interest, use the compound interest formula to determine the amount of accumulated interest on the principal amount invested or borrowed. To figure out compound interest on a loan or deposit, you need to know the principal amount, the annual interest rate and the number of compounding periods.

Compound interest is the interest owed or received that grows at a faster rate than basic interest.

## How to Calculate Interest on Interest (Compound Interest)

The formula to calculate compound interest is the principal amount multiplied by 1, plus the annual interest rate in percentage terms, raised to the total number of compound periods. The principal amount is then subtracted from the resulting value.

Compound Interest = [P (1 + i)n] – P

(Where P = Principal, i = nominal annual interest rate in percentage terms, and n = number of compounding periods.)

For example, assume you want to calculate the compound interest on a \$1 million deposit. The principal is compounded annually at a rate of 5%. The total number of compounding periods is five years.

The resulting compounded interest on the deposit is \$276,281.60, or \$1,000,000 * (1 + 0.05) ^ 5 - \$1,000,000.

Assume you want to calculate the compound interest on a \$1 million deposit. However, this particular deposit is compounded monthly. The annual interest rate is 5%, and the interest accrues at a compounding rate for five years.

To calculate the monthly interest, simply divide the annual interest rate by 12 months. The resulting monthly interest rate is 0.417%. The total number of periods is calculated by multiplying the amount of years by 12 months, since the interest is compounding at a monthly rate. In this case, the total number of periods is 60, or 5 years * 12 months.

The resulting interest, compounded monthly, is \$283,614.31, or (\$1,000,000)*(1+0.00417) ^ 60 - \$1,000,000.

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1. ### How to calculate compound loan interest in Excel?

Find out about compound interest and how to use the compounding interest formula in Microsoft Excel to calculate the compound ... Read Answer >>
2. ### How do I calculate compound interest using Excel?

Learn how to calculate compound interest using three different techniques in Microsoft Excel. Read Answer >>
3. ### Simple versus compound interest

Different methods in interest calculation can end up different interest payment. Learn the differences between simple and ... Read Answer >>
4. ### Continuous compounding versus discrete compounding

Learn to differentiate between and calculate the continuous and discrete compounding formulas and see how it is going to ... Read Answer >>
Related Articles
1. Investing

### Understanding the Power of Compound Interest

Understanding compound interest is important for both investing and borrowing money.
2. Investing

### Learn simple and compound interest

Interest is defined as the cost of borrowing money or the rate paid on a deposit to an investor. Interest can be classified as simple interest or compound interest.
3. Investing

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4. Personal Finance

### How Interest Rates Work on Savings Accounts

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### The Effective Annual Interest Rate

The effective annual interest rate is a way of restating the annual interest rate so that it takes into account the effects of compounding.
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### APR and APY: Why Your Bank Hopes You Can't Tell The Difference

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### 4 Ways Simple Interest Is Used In Real Life

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8. Personal Finance

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9. Retirement

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1. ### Compound Interest

Compound Interest is interest calculated on the initial principal ...
2. ### Compound

Compound is the ability of an asset to generate earnings, which ...
3. ### Periodic Interest Rate

The periodic interest rate is the interest rate charged on a ...
4. ### Effective Annual Interest Rate

The effective annual interest rate is an investment's annual ...
5. ### Continuous Compounding

Continuous compounding is the process of calculating interest ...
6. ### Compounding

Compounding is the process in which an asset's earnings, from ...
Hot Definitions

An investment advisor is any person or group that makes investment recommendations or conducts securities analysis in return ...
2. ### Gross Margin

A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
3. ### Inflation

Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
4. ### Discount Rate

Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
5. ### Economies of Scale

Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
6. ### Quick Ratio

The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
user
The passage provides an explanation of compound interest and how to calculate it using a formula. It also includes two examples of calculating compound interest on a \$1 million deposit, one compounded annually and the other compounded monthly.

Content Structure:
- Explanation of compound interest and the formula to calculate it
- Example 1: Calculating compound interest on a \$1 million deposit compounded annually
- Example 2: Calculating compound interest on a \$1 million deposit compounded monthly

Analysis:
TYPE: SINGLE_QUESTION_WITH_ANSWER

The passage contains a mathematical question (how to calculate compound interest) and provides answers to that question through the formula and two examples.