Simply put Interest earned on interest is known as compound interest. With the example earlier with you would have earned 5 Rs interest on your principle 1st year and then 5.25 Rs interest the next year, the .25 Rs earned is interest on interest.
One of the best Examples I read and remembered was the sale of Manhattans Island for only 24$ in the year 1626 to Peter Minuit. Whole of Manhattan for 24$ looks a great deal as of New-york's real estate today, But consider this what if Peter Minuit would have invested that 24$ @ of 8% till today?
Year 2009 – 1626= 383 years
Invested @ 8%
This would seem like
1st yr. -24$
2nd yr-24+ (24*8% interest)...and so on for 383 yrs.
Surprisingly the value comes to around
One of the best Examples I read and remembered was the sale of Manhattans Island for only 24$ in the year 1626 to Peter Minuit. Whole of Manhattan for 24$ looks a great deal as of New-york's real estate today, But consider this what if Peter Minuit would have invested that 24$ @ of 8% till today?
Year 2009 – 1626= 383 years
Invested @ 8%
This would seem like
1st yr. -24$
2nd yr-24+ (24*8% interest)...and so on for 383 yrs.
Surprisingly the value comes to around
$ 151 TRILLION
Not so good Investment Mr.Peter, Manhattan is definately cheaper today!!
What we did here was tried to find out the Future value of 24$ investment made in 1626 after 383 year This can also be found by using formula for future value.
Where FV is Future value that an investment should generate, PV is the present value that you invest in, “I” here would mean interest and t would be for time frame of investment.
Now you know what to do if you want to be the richest person in the world……
- Invest 24$ in an 8% paying bond for 383 years
&
- Live 383 years to be able to enjoy them!!!!!
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