Compound Interest Explained
Compound interest is a basic term in finance and economics.
Compound interest is the result of reinvesting interest, again and again, on a loan, a deposit or an investment (and in other words – it is “interest on interest”).
On compound interest (or compounding interest) the interest is added on each period, to the principal sum plus all the previously accumulated interest.
Compound Interest Formula
The total accumulated value (FV – future value) includes the current sum (PV – present value) and all the compounded interest (I) and is calculated with the formulas:
- FV = PV (1+i)n
- PV = FV / (1+i)n
Using The Compound Interest Calculator
On our compound interest calculator we provide the option to calculate Compound Interest using:
- Initial sum (PV)
- Annual additions
- Annual interest rate
- Number of years
The compound interest calculator is mainly useful for calculating the future value of an investment or deposit.
Compound Interest And The “Rule of 72”
The “Rule of 72” is based on the concept of compound interest, and calculates the approximate time over which an investment will double, at a given interest rate.
The formula for “Rule of 72” is:
- Number of years to double the investment sum=72/i (“i”=interest rate).
Numerical Examples
- An investment with a 6% interest rate will double in 12 years.
- An investment with a 8% interest rate will double in 9 years.
- An investment with a 9% interest rate will double in 8 years.