You are on page 1of 7

nterest Tables

Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel


(We recommend this as work of authority and you can order it here)

Tables constructed to show the amount of INTEREST that will accrue on a given
convenient (round number) sum, e.g., $1, $100, or $1,000, at different rates of interest
for various intervals of time, rendering unnecessary separate and independent
computations for each interest transactions.

Interest tables are prepared in many different forms with varying degrees of detail and
refinement in decimal places, interest rates, and time intervals, to meet a wide variety of
uses. The following list, illustrated by appended tables, includes the more important
types of interest tables.

1. Simple interest computed on a given principal. The formula for computing annual
simple interest is

I = Pr

where P = principal and r = rate of interest per year. For example, if principal of $1,000
is invested at a 5% annual rate of interest, the dollar interest per year (assuming that
the interest is not reinvested) is

I = 1,000(0.05)
I = 50

Ordinary simple interest is computed on the basis of a 360-day year (see Table 1), while
exact simple interest is computed on the basis of a 365-day year (366 days in leap
years). To determine the dollar amount of interest for principal invested for less than
one year (using exact interest basis of 365-day year), the formula is

I = (PR)(D /365)

where D = the number of days for which the principal is invested. For example, if
principal of $1,000 is invested for 31 days at an annual rate of interest of 5%, the dollar
interest for the 31-day period is

I = 1.000(0.05)(31/365)
= 50(0.0849315)
= 4.2466

By contrast, to determine the dollar amount of interest for principal invested for less than
one year (using ordinary interest basis of 360-day year), the formula is

I = (PrV)(D/360)

so that
I = 1.000(0.05)(31/360)
= 50(0.086111)
= 4.3056 (1,4.1667 for 30 days plus 0.1389 for 1 day)

Thus the 360-day year basis, although simpler to calculate, results in higher
interest. Simplicity of calculation is illustrated by the 60-day, 6% method:

$1,000 for 60 days @ 6% annually equals


$10,00 (simply point off two decimal places)
-8.8333 (1/6th less, or 1%/6%, for 5% rate)

4.1667 for 30 days at 5%

or 1/12th (30/360) of the $50 interest for one year (1,000 x 0.05) equals $4.1667 for the 30
days.

2. Compound interest – the amount of interest that a given principal will accumulate
if invested at specified rate, compounded at specified frequency for specified
total number of periods, if the interest generated is reinvested at the same
rate. The formula for the compound interest as such is

(1 + r V)n = 1

or the compound amount of $1 invested at rate r per interest period for a specified
number of interest periods n minus the principal of $1.

As indicated by Table 3, the compound amount of $1 invested at 5%, compounded


annually for 10 years, is as follows:

(1 + .05)10 = 1.6289

so that deducting the $1 of principal implied, the amount of compound interest is

1.6289 – 1 = 0.6289

The compound amount of $1,000 invested at 5%, compounded annually for 10 years,
therefore is as follows:

C = P(1 + r)n
= 1000(1 + 0.05)10
= 1000(1.6289)
= 1,628.90

where C = compound amount of principal.


To adjust for a specified frequency of compounding, divide the annual rate of interest by
the frequency of compounding per year to obtain the interest rate per period; multiply
the specified number of years by the frequency of compounding to obtain the total
number of interest periods. For example, if the 5% rate above is compounded quarterly,
rate of interest per interest period is

0.05 (annual rate of interest)


___ = 0.0125(1.25%)
4 (frequency of compounding)

and the number of interest periods is

10 x 4 = 40

so that the compound amount of principal and the amount of compound interest may be
determined as above, based on this adjusted interest rate and adjusted number of
interest periods.

3. Future value of a series of payments – the amount to which a series of payments


at the end of each period will accumulate at compound interest. The basic
formula is

S = P1 (1 + r)n-1 + P2(1 + 4)n-2 + . . . + Pn(1 + r)0

where S – future value, P1, P2, . . ., Pn = the payment at end of each period, r= interest
rate, and n = number of periods. The value of (1 + r)n-1 can be derived from Table
3. For example, the future value at the end of two years of payments of $1,000 and
$2,000 at the end of the first and second years, respectively, invested at 5%, will be

S= 1000(1 + 0.05)1 + 2000(1 + 0.05)0


= 1000(1.05) + 2000
= 1050 < + 2000
= 3050

4. Future value of an annuity. This is a special case of the future value formula
above. It is the future value of a series of equal future payments for a given
number of periods, at specified interest rate. Applying the future value formula,
the future value of an annuity is

S = P(1 + r)n-1 + P(1 + r)n-2 + ...


+ P(1 + r)0

where S = future value, P = periodic payment, r = interest rate, and n = number of


periods. Since P, the payment for each period, is equal, the formula can be simplified to

S = P(1 + r)n-1}/r
The value of { (1 + r)n-1}/r can be found in Table 4, for the specified interest rate r and
the number of periods n over which the annuity will extend. For example, the value at
the end of 10 years of an annuity of $1,000 invested at a 10% interest rate will be

= 1000(1 + 0.01)10 – 1}/r


= 1000(15.9374)
= 15,937.40

5. Sinking fund accumulations – the amount of installment to be set aside


periodically (annually, semi-annually, or quarterly) that at a specified rate of
compound interest will accumulate to a total sinking fund sufficient at specified
maturity to retire the principal of a given amount of funds. To determine the
periodic payments, the formula for calculating the future value of an annuity may
be used, as follows:

S = P (1 + r)n-1}/r

In the above formula, the periodic payment is known, but the sum of the payments at
the end of the total period at specified interest rate is unknown. For the sinking fund
accumulation, the sum is known, but the periodic payment is unknown. Therefore the
annuity formula must be solved for P, the periodic payment, rather than S, the sum of
the accumulation. Therefore, the formula is

P = S/{ (1 + r)n –1}/r

For example, to determine the amount to be set aside yearly at a 6% annual rate of
interest that will accumulate to $1 million at the end of 10 years, Table 4 provides the
value of { (1 + r)n – 1}/r, with r at 6% and n at 10, as equal to 13.1803. Therefore:

P = 1,000,000 / 13.1803
= 75,867.93

6. Present value of one or a series of payments to be received (or paid out) in the
future, discounted at specified discount rate. The formula for computing present
value is

PV = 1 + 1 +. . .
+ 1
(1 + k) (1 + k)2 (1 + k) a

where PV = present value, n = year of last payment received (or paid out), and k =
discount rate. For example, the present value of $1 to be received at the end of the first
and second years from the present time, discounted at 5% is as follows:

PV = 1 + 1
2
(1 + 0.05) (1 + 0.05)
= $1 + $1
1.05 1.1025

= 0.9524 + 0.9070

= 1.8594

Table 7 provides the present value of $1, received in 1 to 30 years, discounted at the
rate of 1% to 50%. Rather than divide each numerator by the denominator in the above
equations, multiply the numerator by the present value of $1 discounted at the specified
rate for the specified time period, found in Table 7. For example, to determine the
present value of a $100 inflow at the end of year one, $200 inflow at the end of year
two, and $50 outflow at the end of year three, we may multiply these flows by the
present value of $1 indicated in Table 7 for the respective years, as follows, at 5%
discount rate.

PV = 100(0.9524) + 200(0.9070) - 50(0.8638)

= 95.24 + 181.40 - 43.19

= 233.45

In capital budgeting, one technique of analysis of feasibility of investing in specific


investment proposals is the net present value technique: cash flows each year
anticipated from net income plus depreciation for the full useful life of the proposed
investment in plant ad equipment are discounted at a selected discount rate; the sum of
such discounted present values is then compared with present investment outlay to
show net excess of sum of discounted present values over the investment outlay.

7. Present value of an ANNUITY. A special case of the present value formula


above is the present value of a sum of either equal inflows or equal outflows for a
given number of periods, discounted at specified rate. Adapting the present
value formula in 6 above, since the numerator ($1) is the same for each period,
the formula can be simplified to

PV = 1{1 - (1 + k)-n}/k

the value of which can be found in Table 8 at the specified discount rate k and the
number of periods n over which the annuity will extend. For example, the present value
of an annuity of $1,000 received at the end of each year for 10 years, discounted at
10%, may be determined by multiplying the $1,000 by the factor 6.1446, shown in Table
8.

PV = 1000(6.1446)

= 6.144.60
8. Doubling of principal. Given the interest rate, Table 9 will indicate the number of
years it will take a given principal to double in amount. For example, at 6%
compounded annually, it will take 11.896 years to double the principal.

The formula for determining the number of years in which a given sum will double at
different interest rates may be derived from the compound interest formula (above),
except that the equation is solved for the number of periods rather than the sum to
which the principal will grow. Thus, the compound interest formula is

S = P(1 + r)n

but S, the sum, is specified as equal to twice the principal (S = 2P), so that substituting
for S,

2P = P(1 + r)n

which may be simplified to

2 = (1 + r)n

which by the use of logarithms becomes

n log(1 + r) = log 2

n = log 2
log (1 + 0.06)

= 0.301030
0.025306

= 11.896

9. Monthly savings to attain a specified estate. See appended Table 10 for the
amount to be saved per month, with interest compounded at 4% semi-annually,
to accumulate a specified sum at age 65.
10. Bond interest table. See appended Table 11 for the amount of accrued interest
on a $1,000 bond for 1 day to 6 months at coupon rates for every 0.25% from
3.5% to 5%, and 6%. The interest on a $1,000 bond at 4.5% for 4 months and
23 days would be $15.00 for 4 months and $2.875 for 23 days; total, $17.875.
11. Income from dividend stocks. See appended Table 12 for the approximate
current return, or YIELD, from dividend-paying stocks at prices from 20 to 200,
having a cash rate from $2 to $10 annually.

Simple interest tables for computing interest on short-term loans are based on a 360-
day and 365-day year. Commercial banks customarily use the 360-day tables, but the
Federal Reserve banks compute their transactions on the 365-day table. There are a
number of published tables showing the amount of interest on a given sum at various
interest rates from 1 to 365 days.