Here are some examples for calculating compound interest in word problems.

##### Example 1

What will be the final total amount of money after three years on an original investment of $1,000 if a 12% annual interest rate is compounded yearly?

First, circle what you must find— *final total amount of money.* Note also that interest will be *compounded each year.* Therefore, the solution has three parts, one for each year.

Thus, the total after one year is $1,000 + $120 = $1,120.

*Note that the principal at the beginning of the second year was $1,120.* Thus, the total after two years is $1,120 + $134.40 = $1,254.40.

*Note that the principal at the beginning of the third year was $1,254.40.* Thus, the total after three years is $1,254.40 + $150.53 = $1,404.93.