Compound interest calculator | a tool for the benefit of knowing your worth in savings
Everybody wants to have an enormous amount in their various bank accounts, but the truth is that no rich fellow will realize such dream unless he/she has some savings with yields interest. The compound interest calculator is defined as an online interest calculation tool or application that is used to find the time value or the period of money based on the different compound interest formulas. Definition wise for a thesis proposal, there are two commonly used terminologies when explaining compound interest. They are: annual percent rate (defined as the interest rate compounded monthly) and the other term is the annual percent yield (also can be explained as the interest rate compounded annually).
While comparing the interest rates of different compound periods, compound interest calculator is calculated as follows:
- Yearly based
- Half-yearly
- Quarterly
- Monthly
the listings above give an answer to the most pressing issues or questions asked by most clients, businessmen and women, students, etc. These questions include one of the following:
- How much interest(s) would be paid on the capital amount if money is borrowed from a bank or planned to be borrowed for compound interest in a certain period of time with, of course, a certain compounding period?
- What amount of interest will be gained when lending money for compound interest for a certain time frame with a certain compounding frequency?
Financial institutions differs just as thesis methodology terms, when comparing their compounding rates. It can be: daily, monthly, yearly, quarterly, etc. depending on the financial institution. It is not possible for all the financial institutions to have the same compounding interest rate and as such, one institution has more advantages or disadvantages over the other. Let’s imagine a savings account having a $1000 principal and an interest rate of 10% per month. The compound interest calculator is: a sum of $1100 by the end of the 1st month. Furthermore, by the end of the 2nd month, that available balance of $1100 would have added another 10%, making a total of $1210, etc. this is how the savings account of any client gets percentage increase monthly, yearly, etc.
Compound interest calculator | its terms, formulas and methods of calculation
For the purpose of writing a descriptive essay, compound interest calculator explanation might not be fully understood without defining one of its major component known as “compound interest.” This can be defined as that interest added to your principal amount yearly which makes your savings grow not just exponentially but in an increasing rate. Compound interest is also defined as the concept of adding accumulated interest on the principal amount, such that interest is earned in addition to the interest from that moment onwards.
Compound interest calculator serves as one of the most useful idea in finance. It is the basis of everything that has to do with interest rate starting from personal savings plan or a long-term growth of stock market, and can as well account for the importance of an on-time debt payment and lastly, inflation effects on the economy.
Another similar but different term while explaining compound interest calculator is the simple interest calculator. This application is the opposite of the earlier-mentioned term in this essay. Simple interest calculator is an online interest calculator that is used to find the time value of money so as to calculate how much interest will be gained or charged on a principal amount of money at certain interest rate in a particular time period.
Unlike the compound interest calculator, the capital will not change, but rather remain the same throughout the period for which the principal amount was borrowed. When money is borrowed at simple interest, the interest will be charged on the principal amount of money, and not on any interest that it has earned. This is one big difference between compound interest and simple interest. The interest on principal sum remains the same for every month or year. This is calculated from the principal amount, the simple interest rate and the time length.
There are several formulas used in compound interest calculator. This essay will come in handy when considering how to write a speech based on the formula explanation below. This also depends on time period of the interest to be calculated with either half-yearly, monthly, quarterly or yearly compounding frequencies. Among the formulas are:
- V = P(1+r/n)^nt
This can be used to calculate annual interest. Where V = future value of the investment, P = the principal investment sum, r = the yearly interest rate, n = the number of times that interest is compounded per year while t = the number of years the money is invested for.
When the interest is calculated annually, the formula used is.:
- AMOUNT=P(1+R/100)n
When the interest is compounded semi-annually, the formula to calculate the half-yearly compound interest is.:
- AMOUNT=P(1+(R/2)/100)2n
When the interest is compounded quarterly, the formula used to calculate the quarterly compound interest rate will be.:
- AMOUNT=P(1+(R/4)/100)4n
When the interest is compounded monthly, the formula used to calculate the monthly compound interest is.:
- AMOUNT=P(1+(R/12)/100)12n
Where: P denotes the Principal sum, R denotes the percentage rate of interest, n denotes the time in years or months.
Principal Amount: is the sum of money which is borrowed or invested. In compound interest calculator, the principal amount changes after each compounding period of time such as the principal amount and the total sum of interest gained after the 1st unit of time becomes the principal for the 2nd unit, the principal amount and interest earned on the 2nd unit of time becomes the principal for the 3rd time, etc.
Total Period: it is a time frame to which the principal amount invested at a certain rate of interest. At the end of this time frame, the total amount of principal and interest should be returned.
Compounding Period or Frequency: it is a period of time after which an interest gained on capital used for that period added to the principal is called as compounding period.
Interest Rate: Interest Rate is the rate at which the money is borrowed or saved.
When it comes to online calculation, the compound interest calculator can help you in determining which interest rate as well as the compounding time gives the best interest by comparing different deals available in the finance market.
The modern situation, history and inventor of compound interest calculator
Compound interest was once regarded as a worst kind of usury and was seriously condemned by the roman law and the common laws of few other countries. Richard Witt’s book in 1613 was a landmark in the history of compounding interest. It was wholly devoted to the subject of anatocism, whereas the previous researchers had usually treated compound interest briefly in various science paper s – with only one chapter in a mathematical textbook.
Witt’s book gave tables based on 10% which was the then maximum rate of interest allowed on loans and on other rates for different purposes. For example, the valuation of property rent. Witt was a London mathematical practitioner and his book is noted for its clarity of expression, depth of insight as well as the accuracy of calculation, with 124 worked examples.
Compound interest calculator allows you to compound interest based on a daily, monthly, quarterly, half yearly or yearly basis. Although, savings account may vary on this, so it is very important to check with the bank or financial institution so as to figure out which frequency they compound the interest on your savings. Another question frequently asked by clients is when is interest compounded? When considering savings accounts, interest can be calculated at the beginning or the end of the compounding period (month or year). With this calculator, additions are made at the start of each compounding period.
Furthermore, the effective annual rate is the rate that gets paid after all of the compounding. When compounding interest occurs, the effective annual rate becomes higher than the total interest rate. The number of times the interest is compounded within the year, the higher the annual rate will be.
Interest on financial investments is often calculated, on a semiannual, quarterly, monthly, or daily basis, and also on a yearly basis. Compounding may even occur on a “never-ending” basis. For multi-period investments, compounding frequency has an effect on the final future value. A 10-year $100 investment paying 5.0% for each annual period can lead to the future value of $162.89 after 10 years, as shown in the example above. A ten year $100 investment that pays compounded interest every month, at a monthly rate one-twelfth the annual rate (0.4167% per month), leads to a future value of $164.70 after 10 years.
When investments with different frequencies for compounding are compared to each other, an annual rate of some kind for each is brought into view to ease comparison. The examples used for the purpose of this essay, however, refer to an annual rate usually called the nominal interest rate: Nominal interest rate = interest rate per period x number of periods per annum. When such interest is calculated considering the monthly compounding periods, e.g. 1.0% per period, the nominal interest rate is 12.0%. i.e., 12 x 1.0% = 12.0%.
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