Before examining the subject of the combined interest equation, it is necessary to make a brief explanation about the interest. Then we will continue with the unified interest equation.
Compound Interest Equation
Information About Interest
When you want to take a loan or cash advance from a bank, you will borrow for a certain interest. It will apply different rates of interest depending on the maturity and amount you want. As a result, you will have repaid more money than the first one. This is the simplest expression of the subject of interest. You pay a certain interest not only for banks, but also for a product you buy as we call an open account.
Let’s take a look at information about interest and calculation methods:
What is Interest?
The money received against the operation of the money given as a loan from a bank or a similar place is called interest. Interest rate varies depending on certain issues. The primary issue is maturity and principal amount. For example; banks lend money at a more favorable interest rate until a certain amount and maturity.
To define the interest in terms of economy; It is the income obtained as a result of the sales resulting from the debt agreement. According to capitalism, interest corresponds to the income from capital used as input for production purposes. The reason for this is that capital, which is among the factors of production, is used in a certain period and in return, it is repaid at interest rate.
Simple and compound interest calculation for both borrower and lender; it is extremely important because you can make return-to-debt comparisons correctly. Therefore, interest is also interpreted as the basis of financial mathematics.
What is Simple Interest?
Since simple interest is only interest calculated on principal, we can say that there is a straight logic calculation method. If we immediately formulate;
Interest Amount = Principal * Interest Rate (%) * Maturity
One of the issues to be considered in this type of calculation is that the interest rate is the subject of operation as a percentage. In other words, when 6 percent interest rate is said, the relevant account is made as 0.06.
Another issue to be considered in the calculation is maturity. You should know that a calculation is made on a yearly basis. In other words, when 6 months maturity is said, calculation is made over 0.5 from 6/12 equation. If for 90 days, you should trade approximately 0.25 from 90/365 equation.
What is Compound Interest?
The type of interest in which the sum of the principal and interest obtained in a unit period is accounted as the principal in the subsequent unit periods and is calculated over this new amount is called a compound. In other words, the amount of principal increases for each period compared to interest. In the next period, interest is calculated again on this amount. At this point, a concept called interest rate is included in the equation.
How Compound Interest is Calculated?
Although the logic of compound interest calculation is also easy, performing separate calculations for each period can cause confusion. Therefore, it is useful to go step by step.
To give an example for compound interest; While the compound return of 2000 Turkish lira with a 3-year maturity of 10 percent interest rate is calculated, 2200 liras, which the principal will reach with its interest at the end of the first year, is the principal invested in interest in the second year. This time, the transaction will be made over 2200 lira and at the end of the second year, 2420 lira will be principal. In the third year, calculations will be made over 2420 liras and at the end of the third year, the principal will be 2662 Turkish liras.
When we formulate this process;
Amount Reached at the End of the Period = Principal * (1 + Term Interest) Recurring Period
It is possible to revise this formula for annual, monthly and quarterly periods. Namely;
Annual = Principal * (1 + Term Interest)
Quarterly Periods = Principal * [1 + (Term Interest / 4)] 4
Monthly Periods = Principal * [1 + (Term Interest / 12)] 12
While calculating with the formula, your head is likely to get confused again. You can simply calculate compound interest on the interest calculator above.
compound interest equation