## Time Value of Money

Self-Paced Overview

### Compound Interest Formula

Instead of calculating interest year-by-year, it would be simple to see the future value of an investment using a compound interest formula. The formula for compound interest is:

P_{n} = P_{0}(1 + I)^{n}

where: P_{n} =

P_{0} =

I =

n =

Value at end of n time periods_{ }

Beginning Value_{ }

Interest

Number of years

For example, if one were to receive 5% compounded interest on $100 for five years, to use the formula, simply plug in the appropriate values and calculate.

P_{n} = P_{0}(1 + I)^{n}

so,

P_{n} = $100(1.05)^{5}– or –P_{n} = $127.63

If there was a factor that summarized the part of the compound interest formula highlighted in red in the equation below, then to find future values all that would be necessary is to multiply that factor by the beginning values.

P_{n} = P_{0}(1 + I)^{n}