This calculates the interest earned on an investment or owed on a loan given the following inputs:
- Principal: The initial amount of money invested or loaned.
- Annual Interest Rate (%)
- Interest Type: Simple, Compound, or Continuous
- Years: Time in which the money will be invested or borrowed.
- Compounding Periods per Year: Specified in the terms of the agreement.
This calculator will be useful for anyone trying to compare investment or loan opportunities and weighing risk versus reward for those situations.
Types of Interest
The following types of interest can be calculated by this application:
Simple: Simplest form of interest that is earned once per year.
Compound: Interest is gained at the end of each compounding period (usually a month) and this interest is included when calculating the interest for the next compounding period.
Continuous: Similar to compound interest with an infinite number of compounding periods per year. Calculated using an exponential function.
Given the same annual interest rate and principal, Continuous will always earn more than Compound and Compound will always earn more than Simple.
For example, for a 5 year Certificate of Deposit with an interest rate of 2% and a principal of 5,000AED, the following interest will be earned:
Simple: 300 AED
Compound (12 Periods): 315.24 AED
As you can see, the extra amount that you can earn from continuous versus Monthly Compound interest is quite small (0.27 AED over 5 years in our example).
This application will be most useful for quickly comparing different investment/loan opportunities to determine the highest/lowest possible interest.
For example, pretend you are presented with two investment opportunities:
2.0% Interest Compounded Monthly for 5 Years
2.1% Simple Interest for 5 Years
Which one will provide you with more of an interest return. The simple interest investment has a higher annual interest rate, but because the alternative is compounded monthly it will yield 315.24AED in interest, which is slightly greater than the 315AED yielded by the Simple interest account.