To calculate compound interest on investment one needs to understand what compound interest is and how to it relates with investment. In as much as that there is compound interest calculation there is also the simple interest calculation, all of which can also have a positive influence on investment.
Compound interest is seen as the concept of adding accumulated interest back to the principal sum which was initially used, so that there is a progressive increase on the interest of the investor as the day goes by or through out the period of the investment. The act of declaring interest to be principal is called compounding of interest.Financial institutions vary in terms of their compounding rates, as seen - daily, monthly, yearly, etc. as the case may be.
WHAT IS THE EFFECTIVE ANNUAL RATE?
The effective annual rate is the rate that really gets paid off after all of the interest compounding is done. When compounding of interest takes place in an investment interest, the effective annual interest will definitely become higher than the overall interest rate. The more times the interest is compounded within the year or month, the higher the effective annual rate will be.
WHAT IS THE FORMULA FOR COMPOUND INTEREST?
Annual Compound Interest Formula is given as V = P(1+r/n)(nt).
The popular formula for calculating or solving the annual compound interest is given as V = P(1+r/n)(nt)
V = value of investment, P = the principal investment, R= the interest rate, n = the number of times that interest is compounded per year, t = the number of years (time) the money is invested for.
BENEFITS OF CALCULATING COMPOUND INTEREST ON INVESTMENT
Benefits of using the compound interest on your investment are undeniably awesome and mouth watering. The compound interest is the future of investment because it holds the profit every investor would want to access. Compound interest is inevitably a friend when investing with a large initial principal and a lot of time to develop and grow leading to great accumulation of wealth down the line of the investment.It benefits are essentially seen the time of compounding is increased (monthly or quarterly as the case may be). This gives a potential growth in an exponential manner of all total returns of an investment. A good example is gaining $43,219.42 for a $10000 investment by 5% interest unlike making $25000 using the same figures on a simple interest platform or facility. Future value of an investment increased with increase in HHS principal, interest time and compounding period. No mater the rate at which this investment is made.
DISADVANTAGES OF CALCULATING COMPOUND INTEREST ON INVESTMENT
The compound interest of an investment can be disastrous is certain occasions. As seen when one takes loans for an investment that builds on principal initially placed. This is chiefly the reason why some loans remain ages to be paid off as it uses the ideology of the compound interest. When a trader incurs a debt the interest is paid till the total loan plus the overall interest is paid off. As time chokes such individual the compounding effect of the interest makes the total loan to be repaid so huge that one would not believe he can pay it off.
A trader can combat the negative effects of compounding interest by paying above what is required to be paid monthly or in the required period as stipulated by the documents of such investment. Credit card bills should he paid off at once as soon as possible. Mortgage and car loans can be done by maintaining overall wealth and paying little or more above the minimum each month.
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