COMPOUND INTEREST FORMULA
Compound Interest Formula ; If you ever thought that the role of the mathematics subject in our life is over then you could be quite wrong about this thought because of compound interest formula . Today all calculations for mortgages and loans are all done through compound interest formula.
Just like the word goes the compound interest is compounded annually, quarterly and monthly. Unlike the simple interest formula where you simply multiply the Principal with the rate of interest and the time span in years and you get the interest value separately. This is then added to the principal to see what the total value is. In case of compound interest formula, the total amount is got is the sum plus the interest. Here if you need to identify the interest component alone then you will have to subtract the principal from the total amount to get this.
The compound interest formula is given by CI= P (1+(R/100)) t. In this formula the term CI stands for Compound Interest, P stands for the principal value on which the interest is being calculated, R is the rate of interest and t is the time for which the value is calculated. In general terminology- we should notice that the R is always taken as Rate of Interest annually and the t is the tenure in years. So if you are calculating this in months or if the rate of interest is monthly then the formula I modified accordingly.
Compound Interest formula can come in handy even when there is different % of interest involved for a common principal over tenure of time. For example if you offer to take a home loan that is at 8% in the first year, 9% in the second year and 10% from the third year to the end of the tenure- specific compound interest formula is available to calculate it in one shot. That could be calculated using the following.
CI = P (1+(x/100))*(1+(y/100))*(1+ (z/100) t-2), where t is the total tenure.
This loan is like the backbone of any interest calculation- may it be loans, mortgages or even investments. Most often the compound interest value is higher than the simple interest earned during the same tenure, principal and rate of interest.
With the intervention of technology in every field the internet has also developed the Compound Interest Calculator which helps you in calculating the interest irrespective of how complex the calculation is.
As discussed before the tenure is always expressed in the form of years so if you are trying to calculate it for say 8 months then you should be using 0.67 instead of 1 for the tenure of the investment or loan. Same applies for the rate of interest as well. If the rate of interest is provided quarterly then the R would be replaced by R/4.
Though you might be thinking that this is a small thing and is not of much importance then it is suggested that you give a peep into the world outside where almost all financial calculations for interest are performed using the Compound Interest formula.
