Читать книгу Fundamentals of Financial Instruments - Sunil K. Parameswaran - Страница 78

Assume that Katherine Mitchell has deposited $25,000 with Continental Bank for four years, and that the bank pays 8% interest per annum compounded annually.

The initial investment of $25,000 will become

after one year. The difference in this case, as opposed to the earlier example (2.2) where simple interest was considered, is that the entire accumulated value of $27,000 will earn interest during the second year. Thus, the accumulated value after two years will be

By the same logic the balance after four years will be

The growth pattern is illustrated in the following table.

Notice the following. In the case of simple interest, the interest paid every year was a constant amount of $2,000. In the case of compound interest, however, the amount is steadily increasing, as can be seen in the last column of Table 2.1.

TABLE 2.1 The Compounding Process

Year	Balance at Beginning of Year	Balance at End of Year	Interest for Year
1	25,000.00	27,000.00	2,000.00
2	27,000.00	29,160.00	2,160.00
3	29,160.00	31,492.80	2,332.80
4	31492.80	34,012.22	2,519.42