The calculation of simple interest implies that every time interest is paid, it is withdrawn by the investor. This leaves the principal untouched throughout the period of the loan. This may be the case, however, it is much more usual for investors to add (or compound) the interest to the principal so that the principal grows during the term of the investment.
Formula: A = P(1+(r/100))^n
A = amount in account
P = principal
r = rate (may need to divide by 2 if semiannual)
n = number of compounding periods
Sample problems
$12,000 is placed in a savings account with 8% annual interest and is compounded semi-annually. Find the amount in the account after 10 years.
A = 12,000[1+((8/2)/100)]^(10x2)
A = $2,629.35
