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Calculate the periodic amount you will pay/recieve when borrow/investing funds.
|Where:||P = A / (1 + rt)|
|Total P+I (A)|
|Rate per Period (R)|
|Number of Periods (t)|
Have you thought about how much interest are you actually paying on your current loans or on the outstanding balance of a credit card? Sure, bank officials give you all the information you need, the total percentage of the rate of interest you will be charged annually. But did you know that the interest rate compounding monthly or quarterly will cost you more than the figures actually implied?
The periodic compound interest is the true picture of the actual rate of interest. The importance of periodic compound interest is not only limited to just the cost of paying the interest, understanding it is also crucial with regard to earning interest with financial products, such as fixed deposits and certain mutual funds.
Compounding is generally referred to in relation with interest. Interest is basically a reward for lending money. Banks charge it on loans and credit cards and investors gain it on fixed deposits or any other scheme that uses the amount invested by the investors. You may even collect interest from money you have kept in your savings account because the money you have saved is available for the bank to be used.
Compounding means the earned or payable interest is added to the principal amount of investments. The addition of the earned interest to the principal amount results into a bigger base for interest occurrence in the next compounding period. This essentially means that your interest earns interest.
The periodic compound interest is directly affected by the compounding period. A compounding period means the time frame after which the earned or payable interest is added to the principal amount of investments. The more frequently an investment is compounded the more it grows.
The basic periodic compound interest is calculated with the following formula:
Let's look at an example, we will use GBP (Great British Pounds) as an example currency: say we have two options for investing £1,000, the first option gives an annual interest rate of 7%, but the interest compounds quarterly and the other option pays an annual interest rate of 7.125% compounded annually.
In 5 years time the first option will bring the total amount (principal + interest) to £1,414.78, whereas the total amount of the second option will result in a total amount of £1,090.62. Even though the interest rate is higher in option 2, option 1 results in higher effective rate because of compounding.
The Compound Interest Calculator designed by iCalculator can make your periodic compound interest calculations simpler. It can help you in many ways as follows:
To calculate any of these factors you just have to select the correct option from the dropdown list and enter the following details:
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