Simplified calculation

Formulae are presented in greater detail at time value of money. In the formula below, i is the effective interest rate per period. FV and PV represent the future and present value of a sum. n represents the number of periods. These are the most basic formulas:

The above calculates the future value (FV) of an investment's present value (PV) accruing at a fixed interest rate (i) for n periods.

The above calculates what present value (PV) would be needed to produce a certain future value (FV) if interest (i) accrues for n periods.

The above calculates the compound interest rate achieved if an initial investment of PV returns a value of FV after n accrual periods.

The above formula calculates the number of periods required to get FV given the PV and the interest rate (i). The log function can be in any base, e.g. natural log (ln), as long as consistent bases are used all throughout calculation.

[edit] Compound
A formula for calculating annual compound interest is

Where,

A = final amount P = principal amount (initial investment)

r = annual nominal interest rate (as a decimal)

(it should not be in percentage)

n = number of times the interest is compounded per year t = number of years

Example usage: An amount of $1500.00 is deposited in a bank paying an annual interest rate of 4.3%, compounded quarterly. Find the balance after 6 years. A. Using the formula above, with P = 1500, r = 4.3/100 = 0.043, n = 4, and t = 6:

So, the balance after 6 years is approximately $1,938.84.

[edit] Periodic compounding

The amount function for compound interest is an exponential function in terms of time.

t = Total time in years n = Number of compounding periods per year (note that the total number of compounding periods is ) r = Nominal annual interest rate expressed as a decimal. e.g.: 6% = 0.06

As n increases, the rate approaches an upper limit of er 1. This rate is called continuous compounding, see below. Since the principal A(0) is simply a coefficient, it is often dropped for simplicity, and the resulting accumulation function is used in interest theory instead. Accumulation functions for simple and compound interest are listed below:

Note: A(t) is the amount function and a(t) is the accumulation function.

[edit] Continuous compounding

Continuous compounding can be thought of as making the compounding period infinitesimally small; therefore achieved by taking the limit of n to infinity. One should consult definitions of the exponential function for the mathematical proof of this limit. P1 = P0ert take t as 1 so l n(P1 / P0) = r = ln(1 + R) where R is simple return and r is called log return because it is the logarithm of normal return.

a(t) = ert The amount function is simply A(t) = A0ert The interest rate expressed as a continuously compounded rate is called the force of interest. The annual force of interest is simply 12 times the monthly force of interest. The effective interest rate per year is i = er 1 Using this i the amount function can be written as: A(t) = A0(1 + i)t or A = P(1 + i)t See also logarithmic or continuously compounded return.

[edit] Force of interest

Part of a series of articles on

The mathematical constant e

Natural logarithm Exponential function Applications in: compound interest Euler's identity & Euler's formula half-lives & exponential growth/decay Defining e: proof that e is irrational representations of e LindemannWeierstrass theorem People John Napier Leonhard Euler Schanuel's conjecture

In mathematics, the accumulation functions are often expressed in terms of e, the base of the natural logarithm. This facilitates the use of calculus methods in manipulation of interest formulae. For any continuously differentiable accumulation function a(t) the force of interest, or more generally the logarithmic or continuously compounded return is a function of time defined as follows: