subject: Compound Interest Formula With Deposits: Importance Of The Number Of Compounding [print this page] The compound interest formula with deposits is derived from the compound interest formula. It comes to the theory of adding up all the interest gained to the original amount of an investment or loan. Therefore, interest gains on interest the moment your loan or investment compounds its interest. Compounding is the term used when the interest is added to the original and becomes one with it. The number of times the interest compounds is an essential input in the compound interest formula with deposits. To give you an example, if you are currently investing in a savings account that compounds interest monthly, an original amount of a hundred bucks, and interest rate of one percent per month, then you will gain a total of a hundred and one bucks for the first compounding month of your savings account.
The Importance of the Number of Compounding In Compound Interest Formula with Deposits
With the use of compound interest formula with deposits, you will be able to know how important the number of compounding occurs in your investment or loan. The profits gained from a compound interest greatly depend on how many times it compounds and the rate of interest that the investment has. For one to accurately compute for the profits to be gained, one must know the times the interest gets compounded in using the compound interest formula with deposits. The times the interest gets compounded are mostly once a year, twice a year, four times a year, every month, and even daily. The rate of interest should also be given to you in order to get the total answer to your profits using the compound interest formula with deposits. Most of the times, the monetary organizations give the rates per year.
Types of interest rates used in compound interest formula with deposits
In the compound interest formula with deposits, we also use the yearly interest rate to get the total amount of profits to be gained. If you are given a twelve percent rate on your investment per year, then this just means you get one percent rate in every month. If you will enroll in a loan, you will probably see this in your papers. You do not have to worry when computing with the compound interest formula with deposits since it is a given.
There are two types of yearly rates of interest that are used in the compound interest formula with deposits. The first one is called nominal. It is a fixed annual rate that is usually given in loans. The next one is the effective rate. To have an effective rate of interest, one must reiterate the nominal interest rate to replicate the effective interest rate. This type of rate of interest is the actual percentage of the interest that you gain on investments or pay in loans. The compound interest formula with deposits can work with either of the two.
