Compounding

Question 1

Simple Interest

Answer 1

FV = Original principal amount x [1 + (r x n)]

Question 2

Compound Interest

Answer 2

FV = PV (1 + r)n

Question 3

Continuous Compounding

Answer 3

FV = PV (1 + r)n
If an interest rate of 5% pa were compounded quarterly, rather than annually, the future value is higher. It would be higher still, if 5% pa were compounded monthly, weekly or even daily:
We adjust both the period and the rate:
5% annual rate divided by 12 = 0.4167/monthly compounded
3 years is 36 months – we divide the full period into compounding periods.