This is useful for those who have the habit of saving a certain amount periodically. Our Interest Calculator above allows periodic deposits/contributions. Our Interest Calculator deals with fixed interest rates only. LIBOR is a commercial rate calculated from prevailing interest rates between highly credit-worthy institutions. Both the Fed rate and LIBOR are short-term inter-bank interest rates, but the Fed rate is the main tool that the Federal Reserve uses to influence the supply of money in the U.S. The difference goes to the profit of the bank. Normally, the loan rate is a little higher, and the savings rate is a little lower than the reference rate. Federal Reserve (Fed) funds rate or the LIBOR (London Interbank Offered Rate). The interest rate of a loan or savings can be 'fixed' or 'floating.' Floating rate loans or savings are normally based on some reference rate, such as the U.S. This formula works best for interest rates between 6 and 10%, but it should also work reasonably well for anything below 20%. It will take 9 years for the $1,000 to become $2,000 at 8% interest. It states that in order to find the number of years (n) required to double a certain amount of money with any interest rate, simply divide 72 by that same rate.Įxample: How long would it take to double $1,000 with an 8% interest rate? n = Not for exact calculations as given by financial calculators, but to get ideas for ballpark figures. The Rule of 72Īnyone who wants to estimate compound interest in their head may find the rule of 72 very useful.

The continuous compound will always have the highest return due to its use of the mathematical limit of the frequency of compounding that can occur within a specified time period. This is the power of compound interest everyone likes to talk about, illustrated in a concise graph. There is little difference during the beginning between all frequencies, but over time they slowly start to diverge. The following is a graph showing just that, a $1,000 investment at various compounding frequencies earning 20% interest. The more frequently interest is compounded within a time period, the higher the interest will be earned on an original principal. This is because interest is also earned on interest. When the loan ends, the bank collects $121 from Derek instead of $120 if it were calculated using simple interest instead. This is added to what is owed after year 1: In Derek's case:ĭerek's interest charge at the end of year 2 is $11. For compounding interest, rather than the original amount, the principal + any interest accumulated since is used.

However, the year ends, and in comes another period. This interest is added to the principal, and the sum becomes Derek's required repayment to the bank for that present time. For the first year, we calculate interest as usual. Compound InterestĬompounding interest requires more than one period, so let's go back to the example of Derek borrowing $100 from the bank for two years at a 10% interest rate. Even when people use the everyday word 'interest,' they are usually referring to interest that compounds. However, simple interest is very seldom used in the real world. When more complicated frequencies of applying interest are involved, such as monthly or daily, use the formula: interest = principal × interest rate × Interest = principal × interest rate × term The formula to calculate simple interest is: He would simply be charged the interest rate twice, once at the end of each year.ĭerek owes the bank $120 two years later, $100 for the principal and $20 as interest. Let's assume that Derek wanted to borrow $100 for two years instead of one, and the bank calculates interest annually. This interest is added to the principal, and the sum becomes Derek's required repayment to the bank one year later.ĭerek owes the bank $110 a year later, $100 for the principal and $10 as interest. Derek would like to borrow $100 (usually called the principal) from the bank for one year. The following is a basic example of how interest works. There are two distinct methods of accumulating interest, categorized into simple interest or compound interest. The concept of interest is the backbone behind most financial instruments in the world. Interest is the compensation paid by the borrower to the lender for the use of money as a percent or an amount. Related Investment Calculator | Average Return Calculator | ROI Calculator

Interest expense