COMPOUND INTEREST..

Compound interest is interest calculated on the principal amount invested, which is then added to the principal amount, and compounded again. Compound interest can be earned daily, weekly, monthly or yearly. Generally the more times an amount is compounded, the more money you can make.

As long as you leave an interest earning account alone, by not removing money from it, you begin making more money on your investment (given a stable interest rate) because the money you earn is added back to the principle amount. It’s a simple fact that more money earning interest makes you more money. Each time interest is compounded, the money earned gets added to the total.

If you were raising two rabbits, you might view a similar thing. If the bunnies produced a litter, and you kept all those bunnies, then you might have possibly eight rabbits. The original bunnies would keep on breeding, as would the new litter, and you’d end up with more rabbits then you knew what to do with. Compound interest won’t be quite that dramatic, unless you’re investing huge sums of money. The important parallel is that the first pair of bunnies (your original investment) and their offspring (interest) now combine together to produce yet more bunnies, and as combined, they will produce a great deal more than if they were sold off and separated.

Most investment firms, banks, and the like, will state how often your interest is compounded. In some cases, your investment doesn’t compound, but earns what is called simple interest. This means you only make money on the amount you initially invested, and the profits are not reinvested to make you more money.

You can figure out exactly how much an investment will be worth in a few years if you have a scientific calculator handy. You also need to know the initial investment amount (principal or p), the rate of interest, (r), the number of years you plan to allow the investment to sit (years or y) and the number of times per year you investment will compound (t). Recall that only a portion of the interest would be earned each month, so the interest amount would have to be divided by the total times interest gets compounded each year (t). The formula is as follows:

Total value = p(1 + r/t)ty

Putting this to work, in dollar amounts, you might invest RM10,000 in a savings account that earns 5% interest per year and is compounded monthly. If you leave that money alone for five years, you could figure out exactly how much money you’d make in that time period, and the value of your account at the end of four years. The equation would look like this:

10,000(1 + .05/12)12 X 5 = RM12,833.59

If you only earned simple interest, at even 5.5% per year, you wouldn’t make that much money. Note the following:

10,000(1 + .055 X 5) = RM12,750.00


One reason to understand compound interest is because some accounts that earn simple interest offer a higher yearly interest rate. Yet if your investment is long term, you may make more money with a lower interest rate that compounds your interest. On the other hand, if you know you’ll be removing the money after a year or two, a higher interest rate that is not compounded may be a better investment, than an account with compound interest at a lower rate. Also, don’t be daunted by these formulas if you are calculating interest. If you have access to the Internet, you can find hundreds of sites that offer compound interest calculators and most of them are very easy to use.


Today, calculators will do the computational work for you, however, here's a breakdown of how to calculate compound interest:
Compound interest is interest that is paid on both the principal and also on any interest from past years. It’s often used when someone reinvests any interest they gained back into the original investment. For example, if I got 15% interest on my RM1000 investment, the first year and I reinvested the money back into the original investment, then in the second year, I would get 15% interest on $1000 and the RM150 I reinvested. Over time, compound interest will make much more money than simple interest. The formula used to calculate compound interest is:

M = P( 1 + i )n

M is the final amount including the principal.

P is the principal amount.
i is the rate of interest per year.
n is the number of years invested.

Applying the Formula

Let's say that I have RM1000.00 to invest for 3 years at rate of 5% compound interest.

M = 1000 (1 + 0.05)3 = RM1157.62.

You can see that my RM1000.00 is worth RM1157.62.

sample of SIMPle interest..

Ray just got a full-time job and wants to start saving money so he can raise a family. His brother Bart's advice to Ray was to open a savings account so it can accumulate interest.

Beth does not have enough money to pay for college. She will have to take out student loans from the government. As long as she qualifies, there is no limit to how much she can borrow, but she will have to pay back the loans with interest when she graduates.


Both Beth and Ray’s situations deal with interest.
Interest formulas can be quite complicated and difficult to understand. Interest plays a major role in our everyday lives. The simple interest formula is a basic formula that we can use to study interest.


Three things are needed to calculate simple interest:

Principle = the amount put into the bank or
the amount borrowed from the bank

Rate = the percent

Time = how many years the money is in the savings account at the bank or how many years it will take you to pay back the loan.


The formula for calculating interest is very simple:


Simple Interest = Principle x Rate x Time(in years)


The tricky part about calculating the interest is the time aspect. The time must be in years. If the time is given in months, simply divide your months by 12. This is because there are 12 months in a year.


Example: Ray put RM1,000 into a savings account. The interest on the account is 3.5%. He wants to put the money away for 18 months.
How much will Ray have at the end of that time period?
I = p x r x t
I = $1,000 x 3.5% x 18
I = RM1,000 x 0.035 x 18
(change the percent to a decimal)
I = RM1,000 x 0.035 x 1.5
(divide the number of months by 12)
I = RM52.50
Adding the interest back on to the principle, Ray now has RM1,052.50



Beth does not have enough money to pay for college. She will have to take out student loans from the government. As long as she qualifies, there is no limit to how much she can borrow, but she will have to pay back the loans with interest when she graduates.


Beth owes RM38,000 in student loans. The interest rate on her loans is 8.25%. She will be paying these loans off for 20 years. How much will Beth pay altogetherI = px r x t
I = RM38,000 x 8.25% x 20
I = RM38,000 x .0825 x 20
(change the percent to a decimal)
I = RM62,700
Adding the interest back on to the principle, Beth has to pay RM100,700.



Luckily for Beth, the president is attempting to pass a law stating the interest on student loan payments cannot exceed 7%.

simple interest

Simple Interest

When money is borrowed, interest is charged for the use of that money for a certain period of time. When the money is paid back, the principal (amount of money that was borrowed) and the interest is paid back. The amount to interest depends on the interest rate, the amount of money borrowed (principal) and the length of time that the money is borrowed.
The formula for finding simple interest is: Interest = PrincipalxRatexTime. If RM100 was borrowed for 2 years at a 10% interest rate, the interest would be RM100X10%X2 = RM20. The total amount that would be due would be RM100+RM20=RM120.

Simple interest is generally charged for borrowing money for short periods of time. Compound interest is similar but the total amount due at the end of each period is calculated and further interest is charged against both the original principal but also the interest that was earned during that period.
Calculating Interest: Principal, Rate and Time are Known.

M4500.00 AT 9.5% FOR 6years
I= PrtI= (4500)(0.095)(6)
I= RM2565.00

For the above calculation, we have $4500.00 to invest (or to borrow) with a rate of 9.5% for a 6 year period of time.

Calculating Interest When the Time is Given in Days

RM6300.00 at 8% for 310/365 years
I= Prt
I= (6300)(0.08)(310/365)
I= RM428.05

Let's say you want to borrow RM6300.00 from March 15th, 2007 until January 20th 2008 at a rate of 8%. The formula will still be I = Prt, however, we need to calculate the days. To do so, we will not count the day the money is borrowed or the day the money is returned. Let's figure out the days: March = 16, April = 30, May = 31, June = 30, July = 31, August = 31, September = 30, October = 31, November = 30, December = 31, January = 19. Therefore the time is 310/365. A total of 310 days out of 365. This is entered into the t for the formula.

What Annual Rate of Interest Is Needed for RM2100.00 TO earn RM122.50 in 14months?

r=I/Pt
r=122.50/(2100)(14/12)
r=(122.50)(12)/(2100)(14)
r=1470/29400
r=0.05 =5%

When the amount of interest, the principal and the time period are known, you can use the derived formula from the simple interest formula to determine the rate. I=Prt becomes r=I/Pt. Remember to use 14/12 for time and move the 12 to the numerator in the formula above. Get your calculator and check to see if you're right.