How does compounding frequency affect final amount for 10 years

see full answer

Your Exam Success, Personally Taken Care Of

1:1 expert mentors customize learning to your strength and weaknesses – so you score higher in school , IIT JEE and NEET entrance exams.

An Intiative by Sri Chaitanya

(Unlock A.I Detailed Solution for FREE)

Best Courses for You

JEE

NEET

Foundation JEE

Foundation NEET

CBSE

Detailed Solution

The higher the compounding frequency (n), the greater the final amount, because interest is added to the principal more often, which then starts earning its own interest sooner.

Let's use our example: P = $1,000, r = 5% (0.05), t = 10 years, and we will vary n.

Compounding Frequency	'n' Value	Final Amount after 10 Years
Annually	1	$1,628.89
Semi-Annually	2	$1,638.62
Quarterly	4	$1,643.62
Monthly	12	$1,647.01
Daily	365	$1,648.66
Continuously	n/a (uses e)	$1,648.72

As you can see, the final amount increases with the frequency, but the increases become smaller. The jump from Annually to Semi-Annually is ~$10, while the jump from Daily to Continuously is only a few cents. Continuous compounding represents the absolute maximum possible return at that rate.

Watch 3-min video & get full concept clarity