HP 10B - Manual (Page 49)

Compound Interest
A compound-interest contract is like a scries of simplc-intcrcst contracts
that arc connected. The length of each simplc-intcrcst contract is equal to
one compounding period. At the end of each period the interest earned
on each simple-interest contract is added to the principal. For example, if
you deposit $ 1 , 000.00 in a savings account that pays 6 % annual interest,
compounded monthly, your earnings for the first month look like a
simplc-intcrcst contract written for 1 month at V 2 % ( 6 % 12). At the
end of the first month the balance of the account is $1,005.00 (5 is V 2 % of
1 , 000 ).
The second month, the same process takes place on the new balance of
$1,005.00. The amount of interest paid at the end of the second month is
V 2 % of $1,005.00, or $5.03. The compounding process continues for the
third, fourth, and fifth months. The intermediate results in this illustration
arc rounded to dollars and cents.
1,005.00
- 1 , 000.00
1,010.03
-1,005.00
1,015.08
-1,010.03
1,020.16
-1,015.08
1,025.26
-1,020.16
The word compound in compound interest comes from the idea that
interest previously earned or owed is added to the principal. Thus, it can
earn more interest. The Tmancial calculation capabilities on the HP-lOB
arc based on compound interest.
4S 4: Picturing Financial Problema