Calculate Simple and Compound Interest Rates - Corporate ...

#2 Compound Interest · P = Principal amount · i = Annual interest rate · n = Number of compounding periods for a year. InterestRateAmountchargedbyalendertoaborrowerforadebtHome›Resources›Knowledge›Finance›InterestRateWhatisanInterestRate?AninterestratereferstotheamountchargedbyalendertoaborrowerforanyformofdebtCurrentDebtOnabalancesheet,currentdebtisdebtsduetobepaidwithinoneyear(12months)orless.Itislistedasacurrentliabilityandpartofgiven,generallyexpressedasapercentageoftheprincipal.TheassetborrowedcanbeintheformofcashMonetaryAssetsMonetaryassetscarryafixedvalueintermsofcurrencyunits(e.g.,dollars,euros,yen).Theyarestatedasafixedvalueindollarterms.,largeassetssuchasvehicleorbuilding,orjustconsumergoods.Inthecaseoflargerassets,theinterestrateiscommonlyreferredtoasthe“leaserate.”  InterestratesaredirectlyproportionaltotheamountofriskSystemicRiskSystemicriskcanbedefinedastheriskassociatedwiththecollapseorfailureofacompany,industry,financialinstitutionoranentireeconomy.Itistheriskofamajorfailureofafinancialsystem,wherebyacrisisoccurswhenprovidersofcapitallosetrustintheusersofcapitalassociatedwiththeborrower.Interestischargedascompensationforthelosscausedtotheassetduetouse.Inthecaseoflendingmoney,thelendercould’veinvestedthemoneyinsomeotherventureinsteadofgivingitasaloan.Inthecaseoflendingassets,thelendercould’vegeneratedincomebymakinguseoftheassethimself.Thus,inreturnfortheselostopportunities,interestratesareappliedascompensation.Theannualinterestratereferstotheratethatisappliedoveraperiodofoneyear.Interestratescanbeappliedoverdifferentperiods,suchasmonthly,quarterly,orbi-annually.However,inmostcases,interestratesareannualized.Interestratecanalsorefertotheratepaidbythebanktoitsclientsforkeepingdepositsinthebank. Fixedvs.Floating(Variable)RateInterestratescanbefixed,wheretherateremainsconstantthroughoutthetermoftheloan,orfloatingFloatingInterestRateAfloatinginterestratereferstoavariableinterestratethatchangesoverthedurationofthedebtobligation.Itistheoppositeofafixedrate.,wheretherateisvariableandcanfluctuatebasedonareferencerate.Moreinformationregardingthesetwotypesofloanfeaturescanbefoundinthefollowingarticle:LoanFeatures.LoanFeaturesThemainfeaturesofloansincludesecuredvs.unsecuredloans,amortizingvs.non-amortizingloans,andfixed-ratevs.variable-rate(floating)loans. CostofBorrowingTheinterestexpense–alsoknownasthecostofborrowingmoney–canbeclassifiedintothefollowingtwotypes: #1SimpleInterestThistypeofinterestiscalculatedontheoriginalorprincipalamountofloan.TheformulaforcalculatingsimpleinterestSimpleInterestSimpleinterestformula,definitionandexample.Simpleinterestisacalculationofinterestthatdoesn'ttakeintoaccounttheeffectofcompounding. Inmanycases,interestcompoundswitheachdesignatedperiodofaloan,butinthecaseofsimpleinterest,itdoesnot. Thecalculationofsimpleinterestisequaltotheprincipalamountmultipliedbytheinterestrate,multipliedbythenumberofperiods.is:  Forexample,ifthesimpleinterestrateis5%onaloanof$1,000foradurationof4years,thetotalsimpleinterestwillcomeouttobe:5%x$1,000x4=$200. #2CompoundInterestCompoundinterestCompoundGrowthRateThecompoundgrowthrateisameasureusedspecificallyinbusinessandinvestingcontexts,thatindicatesthegrowthrateovermultipletimeperiods.Itisameasureoftheconstantgrowthofadataseries.Thebiggestadvantageofthecompoundgrowthrateisthatthemetrictakesintoconsiderationthecompoundingeffect.iscalculatednotjustonthebasisoftheprincipalamountbutalsoontheaccumulatedinterestofpreviousperiods.Thisisthereasonwhyitisalsocalled“interestoninterest.”Theformulaforcompoundinterestisasfollows:  Where:P=Principalamounti=Annualinterestraten=NumberofcompoundingperiodsforayearUnlikesimpleinterestSimpleInterestSimpleinterestformula,definitionandexample.Simpleinterestisacalculationofinterestthatdoesn'ttakeintoaccounttheeffectofcompounding. Inmanycases,interestcompoundswitheachdesignatedperiodofaloan,butinthecaseofsimpleinterest,itdoesnot. Thecalculationofsimpleinterestisequaltotheprincipalamountmultipliedbytheinterestrate,multipliedbythenumberofperiods.,thecompoundinterestamountwillnotbethesameforallyearsbecauseittakesintoconsiderationtheaccumulatedinterestofpreviousperiodsaswell. DownloadtheFreeTemplateEnteryournameandemailintheformbelowanddownloadthefreetemplatenow!InterestCalculatorDownloadthefreeExceltemplatenowtoadvanceyourfinanceknowledge!FirstName*Email*Δ RealandNominalInterestRatesAnominalinterestrateisonewithnoadjustmentsmadeforinflation.FiscalPolicyFiscalPolicyreferstothebudgetarypolicyofthegovernment,whichinvolvesthegovernmentcontrollingitslevelofspendingandtaxratesInotherwords,regardlessoftherateofinflationintheeconomy,theinterestreceived,forexample,onadeposit,willbethesameevenafteranumberofyears.Therealinterestratetakestheinflationrateintoaccount.Therepaymentofprincipalplustheinterestismeasuredonthebasisofrealtermscomparedagainstthebuyingpoweroftheamountatthetimeitwasborrowed,lent,invested,ordeposited.It’simportanttofactorintheeffectsofinflationonpurchasingpowerbecausethat’stheonlywaytoknowifyou’rereallyearningareturnfromtheinterestbeingpaid.Forexample,ifyoudepositmoneywithabankandearnanominal2%annualinterest–iftheinflationrateis4%,thenintermsofpurchasingpower,themoneyyouhaveondepositisactuallylosing2%ofitsvalueeveryyear.Therealrateofreturnonaninterest-bearingaccountisthenominalinterestrateMINUStherateofinflation.Thestatedinterestrateisjustthe“nominal”rate,meaning“innameonly”–i.e.,nottheREALratebeingearned. FactorsAffectingInterestRates 1.ForcesofdemandandsupplyInterestratesareinfluencedbythedemandfor,andsupplyof,creditinaneconomy.Anincreaseindemandforcrediteventuallyleadstoariseininterestrates,orthepriceofborrowing.Conversely,ariseinthesupplyofcreditleadstoadeclineininterestrates.Thecreditsupplyincreaseswhenthetotalamountofmoneythat’sborrowedgoesup.Forexample,whenmoneyisdepositedinbanks,itisinturnusedbybanksforinvestmentactivitiesortolenditelsewhere.Asbankslendmoremoney,thereismorecreditavailable,andthusborrowingincreases.Whenthisoccurs,thecostofborrowingdecreases(duetonormalsupplyanddemandeconomics).2.InflationThehighertheinflationrate,thehigherinterestratesrise.Thatisbecauseinterestearnedonmoneyloanedmustcompensateforinflation.Ascompensationforadeclineinthepurchasingpowerofmoneythattheywillberepaidinthefuture,lenderschargehigherinterestrates. 3.GovernmentInsomecases,thegovernment’smonetarypolicyinfluencestheamountofinterestrates.Also,whenthegovernmentbuysmoresecurities,banksareinjectedwithmoremoneytobeusedforlending,andthusinterestratesdecrease.Whenthegovernmentsellsthesesecurities,moneyfromthebanksgetsdrained,givingbankslessmoneyforlendingpurposesandleadingtoariseininterestrates. RelatedReadingsThankyouforreadingthisguidetointerestrates.TocontinueadvancingyourcareerasaFinancialModelingandValuationAnalyst(FMVA)®BecomeaCertifiedFinancialModeling&ValuationAnalyst(FMVA)®CFI'sFinancialModelingandValuationAnalyst(FMVA)®certificationwillhelpyougaintheconfidenceyouneedinyourfinancecareer.Enrolltoday!,theseadditionalCFIresourceswillbehelpful:CostofDebtCostofDebtThecostofdebtisthereturnthatacompanyprovidestoitsdebtholdersandcreditors.CostofdebtisusedinWACCcalculationsforvaluationanalysis.CouponRateCouponRateAcouponrateistheamountofannualinterestincomepaidtoabondholder,basedonthefacevalueofthebond.LawofSupplyLawofSupplyThelawofsupplyisabasicprincipleineconomicsthatassertsthat,assumingallelsebeingconstant,anincreaseinthepriceofgoodsTransferPricingTransferPricingTransferpricingreferstothepricesofgoodsandservicesthatareexchangedbetweencompaniesundercommoncontrol.FinancialAnalystTrainingGetworld-classfinancialtrainingwithCFI’sonlinecertifiedfinancialanalysttrainingprogramBecomeaCertifiedFinancialModeling&ValuationAnalyst(FMVA)®CFI'sFinancialModelingandValuationAnalyst(FMVA)®certificationwillhelpyougaintheconfidenceyouneedinyourfinancecareer.Enrolltoday!!Gaintheconfidenceyouneedtomoveuptheladderinahighpoweredcorporatefinancecareerpath. LearnfinancialmodelingandvaluationinExceltheeasyway,withstep-by-steptraining.