STEP 1 : Recall what is principal amount

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STEP 2: Recall what is simple interest

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Compound interest is calculated based on the principal, interest rate (APR or annual percentage rate), and the time involved:

P is the principal (the initial amount you borrow or deposit)

r is the annual rate of interest (percentage)

n is the number of years the amount is deposited or borrowed for.

A is the amount of money accumulated after n years, including interest.

When the interest is compounded once a year:

A = P(1 + r)^{n}

However, if you borrow for 5 years the formula will look like:

A = P(1 + r)^{5}

This formula applies to both money invested and money borrowed.