In the formula for yearly compounding, a = p(1 + r)n, n represents __________.
Compounding is different from simple interest since compounding comes into effect on the previous interest along with the principal amount.
Answer: In the formula for yearly compounding, a = p(1 + r)n, n represents the number of compounding periods.
Go through the explanation to understand better.
In very simple words, the compound interest is earned on the money that was previously earned as the interest. Compound interest causes interest and account balances to grow.
A(t) = P(1 + r/n)nt
A(t) is the amount/closing value,
t is time measured in years,
P is the initial amount, often called the principal or more usually as present value,
r is the annual percentage rate (APR) represented as a decimal, and
n is the number of compounding periods/frequency of the periods in one year.
The more frequent the compounding periods, the more dramatic can be the results. You might only see interest payments added to your account on a monthly basis, but calculations can still be done on a daily basis. While some accounts calculate the interest manually, so some only calculate monthly.