In the formula for yearly compounding, the variable n represents the number of times that interest is compounded in a year. Typically, for yearly compounding, n is equal to 1 since the interest is calculated and added to the principal balance once every year.
To explain further, the compounding formula is generally written as:
A = P(1 + r/n)^(nt)
In this formula:
- A is the amount of money accumulated after n years, including interest.
- P is the principal amount (the initial amount of money).
- r is the annual interest rate (decimal).
- t is the time period the money is invested or borrowed for, in years.
- n is how many times the interest is compounded per year.
Therefore, in the context of yearly compounding, n acts as a crucial factor that determines how frequently the interest is applied to the principal, affecting the overall growth of the investment or debt over time.