Interest rate is the percentage of principal charged for the money borrowed. When a percent borrows money (known as the principal) on interest, that person has an agreement with the lender to pay a certain percentage of the principal to the lender at a specified period of time, in addition to the money borrowed. A very good example is money deposited in the bank. The reason banks pay their depositors some interest, usually at the end of a month, is because the banks borrows it for one business or the other.
Annual interest rate, on the other hand, is the amount of money earned or paid on an investment after a period of one year. It is also called “effective annual interest rate”, and is calculated as
F = (1 + i/n)n – 1
i = stated annual interest rate
n = umber of compounding periods
THE BENEFITS OF ANNUAL INTEREST RATE ON INVESTMENT
The concept of annual interest rate on an investment is pretty important in the field of finance. This is because it is used to calculate different items whose compound interest has to be calculated differently. If there are two similar investments with different interest rates, the annual interest rate on investment formula can be use to determine which investment can pay more than the other. This is a good one for anyone looking to start a business and is probably torn between two options and a budget. With this concept, the investor can easily tell which one can pay better over a specified period of time.
MORE IDEAS ON CALCULATING THE GROWTH OF AN INVESTMENT
Things have gone pretty hyper. Technology has so developed to the point that there is some program or machine for doing almost everything; like calculating the interest rate of an investment by the rate of its growth. The calculator is programmed with the necessary formula needed for such calculations, all that needs to be done is to enter whatever information that is needed and the result will pop out in a matter of seconds.
To find the annual interest rate of an investment, the calculator will usually demand the following information
- Amount of money invested
- Starting date of the investment
- Ending date of the investment
- Amount returned
In this case, since the focus is on annual return of an investment, the date will have to be a period of 12 months.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.