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Compound interest

With compound interest, interest is also calculated on previously earned interest, not just the original amount. This gives exponential rather than linear growth. The rule of 72/rate gives a quick estimate of how many years it takes to double an amount.

F = P(1+r)^n

future value with compound interest

n \approx \frac{72}{100r}

rule of thumb for doubling time (

r

in %)

Symbols

$P$	starting amount	kr
$r$	annual interest rate
$n$	number of years

Example

1000 kr at 10% interest for 5 years:

$F = 1000\cdot 1.1^5 \approx 1611$ kr.

The rule of 72 is a rule of thumb — for the exact doubling time use

n = \ln 2/\ln(1+r)

Practise interest and time value for free →

← Present value and discounting · Effective and nominal interest →

Part of Engineering Economics: Interest and time value.