Are you paying off your credit card or investing to save some extra cash? Find out the interest you are earning or accruing with the right formula.
- TIP: Using the example, principal compounded twice annually for three years would equal six.
- Step 1: Multiply the number of times interest is compounded by the time period and record the answer.
- TIP: For example, an interest rate of 8 percent compounded twice annually, or .04, plus one equals 1.04.
- Step 2: Calculate one plus the interest rate, divided by the number of times compounded, raised to the exponent found by multiplying the number of times compounded and the time period.
- TIP: Using the previous example, the answer of 1.04 raised to the sixth power equals 1.265.
- FACT: The Federal Reserve was created in 1913 to make the United States monetary system and banking system safer.
- Step 3: Multiply the original amount, or principal, by the value of the sum of one plus rate divided by the number of times interest is compounded in a year all raised to the power of the product of the number times compounded times the time period, found in the previous step. The answer is the compound interest accrued. Use your calculations to determine a payment schedule or the future value of your investment.
- Step 4: Divide the interest rate by the number of times interest is compounded each year. Then add one to the answer and record the answer.
- Step 5: Write the formula "Interest equals principle times the sum of one plus rate over the number of times interest is compounded raised to the power of the product of the number of times compounded times the time." to find compound interest rates. Record the principal, decimal interest rate, number of times the interest is compounded annually, and the time period.
- TIP: If your time period is in months, divide by 12 to determine the period in years.
- Step 6: Determine the interest rate and the time, in years, that the interest will be accrued and write these values down.
- TIP: Simple interest is calculated based on the original amount. Compound interest is found where the interest is added to the previous amount and then calculated each period.
- Step 7: Write the values for the original investment or debt, the interest rate, and time period on a piece of paper.
- Step 8: Convert the interest rate to a decimal figure by dividing it by 100.
- Step 9: Find the number of times per year interest is compounded to find compound interest rate.
- Step 10: Find simple interest by using the formula "interest equals principle times rate times time." Multiply the original amount, or principal, by the decimal interest rate, and then multiply the product by the time period.
- Step 11: Determine the type of interest you need to find. Simple interest and compound interest are calculated differently.