This finance calculator can be used to calculate the future value (FV), periodic payment (PMT), interest rate (I/Y), number of compounding periods (N), and PV (Present Value). Each of the following tabs represents the parameters to be calculated. It works the same way as the 5-key time value of money calculators, such as BA II Plus or HP 12CP calculator.
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FV = $-9,455.36
Sum of all periodic payments | $-20,000.00 |
Total Interest | $9,455.36 |
Period | PV | PMT | Interest | FV |
1 | $20,000.00 | $-2,000.00 | $1,200.00 | $-19,200.00 |
2 | $19,200.00 | $-2,000.00 | $1,152.00 | $-18,352.00 |
3 | $18,352.00 | $-2,000.00 | $1,101.12 | $-17,453.12 |
4 | $17,453.12 | $-2,000.00 | $1,047.19 | $-16,500.31 |
5 | $16,500.31 | $-2,000.00 | $990.02 | $-15,490.33 |
6 | $15,490.33 | $-2,000.00 | $929.42 | $-14,419.75 |
7 | $14,419.75 | $-2,000.00 | $865.18 | $-13,284.93 |
8 | $13,284.93 | $-2,000.00 | $797.10 | $-12,082.03 |
9 | $12,082.03 | $-2,000.00 | $724.92 | $-10,806.95 |
10 | $10,806.95 | $-2,000.00 | $648.42 | $-9,455.36 |
In basic finance courses, lots of time is spent on the computation of the time value of money, which can involve 4 or 5 different elements, including Present Value (PV), Future Value (FV), Interest Rate (I/Y), and number of periods (N). Periodic Payment (PMT) can be included but is not a required element.
Suppose someone owes you $500. Would you rather have this money repaid to you right away in one payment, or spread out over a year in four installment payments? How would you feel if you had to wait to get the full payment, instead of getting it all at once? Wouldn't you feel that the delay in the payment cost you something?
According to a concept that economists call the 'time value of money,' you will probably want all the money right away because it can immediately be deployed for many different uses: spent on the lavish dream vacation, invested to earn interest, or used to pay off all or part of a loan. The 'time value of money' refers to the fact that a dollar in hand today is worth more than a dollar promised at some future time.
This is the basis of the concept of interest payments; a good example is when money is deposited in a savings account, small dividends are received for leaving the money with the bank; the financial institution pays a small price for having that money at hand. This is also why the bank will pay more for keeping the money in longer, and for committing it there for fixed periods.
This increased value in money at the end of a period of collecting interest is called future value in finance. Here is how it works.
Suppose $100 (PV) is invested in a savings account that pays 10% interest (I/Y) per year. How much will there be in one year? The answer is $110 (FV). This $110 is equal to the original principal of $100 plus $10 in interest. $110 is the future value of $100 invested for one year at 10%, meaning that $100 today is worth $110 in one year, given that the interest rate is 10%.
In general, investing for one period at an interest rate r will grow to (1 + r) per dollar invested. In our example, r is 10%, so the investment grows to:
1 + 0.10 = 1.10
$1.10 dollars per dollar invested. Because $100 was invested in this case, the result, or FV is:
$100 × 1.10 = $110
The original $100 investment is now $110. However, if that money is kept in the savings account further, what will be the resulting FV after two years, assuming the interest rate remains the same?
$110 × 0.10 = $11
$11 will be earned in interest after the second year, making a total of:
$110 + $11 = $121
$121 is the future value of $100 in two years at 10%.
Also, the PV in finance is what the FV will be worth given a discount rate, which carries the same meaning as interest rate except applied inversely with respect to time (backwards rather than forward. In the example, the PV of a FV of $121 with a 10% discount rate after 2 compounding periods (N) is $100.
This $121 FV has several different parts in terms of its money structure:
PMT or periodic payment is an inflow or outflow amount that occurs at each period of a financial stream. Take for instance, a rental property that brings in rental income of $1,000 per month, a recurring cash flow. Investors may wonder what the cash flow of $1,000 per month for 10 years is worth, otherwise they have no conclusive evidence that suggests they should invest so much money into a rental property. As another example, what about the evaluation of a business that generates $100 in income every year? What about the payment of a down payment of $30,000 and a monthly mortgage of $1,000? For these questions, the payment formula is quite complex so it is best left in the hands of our Finance Calculator, which can help evaluate all these situations with the inclusion of the PMT function. Don't forget to choose the correct input for whether payments are made at the beginning or end of compounding periods; the choice has large ramifications on the final amount of interest incurred.
For any business student, it is an immensely difficult task to navigate finance courses without a handy financial calculator. While most basic financial calculations can technically be done by hand, professors generally allow students to use financial calculators, even during exams. It's not the ability to perform calculations by hand that's important; it's the understanding of financial concepts and how to apply them using these handy calculating tools that were invented. Our web-based financial calculator can serve as a good tool to have during lectures or homework and because it is web-based, it is never out of reach, as long as a smartphone is nearby. The inclusion of a graph and a schedule, two things missing from physical calculators, can be more visually helpful for learning purposes.
In essence, our Finance Calculator is the foundation for most of our Financial Calculators. It helps to think of it as an equivalent to the steam engine that was eventually used to power a wide variety of things such as the steamboat, railway locomotives, factories, and road vehicles. There can be no Mortgage Calculator, or Credit Card Calculator, or Auto Loan Calculator without the concept of the time value of money as explained by the Finance Calculator. As a matter of fact, our Investment Calculator is simply a rebranding of the Finance Calculator while everything underneath the hood is essentially the same.
Our Interest Calculator can help determine the interest payments and final balances on not only fixed principal amounts, but also additional periodic contributions. There are also optional factors available for consideration such as tax on interest income and inflation. To understand and compare the different ways in which interest can be compounded, please visit our Compound Interest Calculator instead.
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Interest is the compensation paid by the borrower to the lender for the use of money as a percent, or an amount. The concept of interest is the backbone behind most financial instruments in the world.
There are two distinct methods of accumulating interest, categorized into simple interest or compound interest.
The following is a basic example of how interest works. Derek would like to borrow $100 (usually called the principal) from the bank for one year. The bank wants 10% interest on it. To calculate interest:
$100 × 10% = $10
This interest is added to the principal, and the sum becomes Derek's required repayment to the bank one year later.
$100 + $10 = $110
Derek owes the bank $110 a year later, $100 for the principal and $10 as interest.
Let's assume that Derek wanted to borrow $100 for two years instead of one, and the bank calculates interest annually. He would simply be charged the interest rate twice, once at the end of each year.
$100 + $10(year 1) + $10(year 2) = $120
Derek owes the bank $120 two years later, $100 for the principal and $20 as interest.
The formula to calculate simple interest is:
interest = principal × interest rate × term
When more complicated frequencies of applying interest are involved, such as monthly or daily, use formula:
interest = principal × interest rate × |
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However, simple interest is very seldom used in the real world. Even when people use the everyday word 'interest', they are usually referring to interest that compounds.
Compounding interest requires more than one period, so let's go back to the example of Derek borrowing $100 from the bank for two years at a 10% interest rate. For the first year, we calculate interest as usual.
$100 × 10% = $10
This interest is added to the principal, and the sum becomes Derek's required repayment to the bank for that present time.
$100 + $10 = $110
However, the year ends, and in comes another period. For compounding interest, rather than the original amount, the principal + any interest accumulated since, is used. In Derek's case:
$110 × 10% = $11
Derek's interest charge at the end of year 2 is $11. This is added to what is owed after year 1:
$110 + $11 = $121
When the loan ends, the bank collects $121 from Derek instead of $120 if it were calculated using simple interest instead. This is because interest is also earned on interest.
The more frequently interest is compounded within a time period, the higher the interest will be earned on an original principal. The following is a graph showing just that, a $1,000 investment at various compounding frequencies earning 20% interest.
There is little difference during the beginning between all frequencies, but over time they slowly start to diverge. This is the power of compound interest everyone likes to talk about, illustrated in a concise graph. Continuous compound will always have the highest return, due to its use of the mathematical limit of the frequency of compounding that can occur within a specified time period.
Anyone who wants to estimate compound interest in their head may find the rule of 72 very useful. Not for exact calculations as given by financial calculators, but to get ideas for ballpark figures. It states that in order to find the number of years (n) required to double a certain amount of money with any interest rate, simply divide 72 by that same rate.
Example: How long would it take to double $1,000 with an 8% interest rate?
n = |
| = 9 |
It will take 9 years for the $1,000 to become $2,000 at 8% interest. This formula works best for interest rates between 6 and 10%, but it should also work reasonably well for anything below 20%.
The interest rate of a loan or savings can be 'fixed' or 'floating'. Floating rate loans or savings are normally based on some reference rate, such as the U.S. Federal Reserve (Fed) funds rate or the LIBOR (London Interbank Offered Rate). Normally, the loan rate is a little higher and the savings rate is a little lower than the reference rate. The difference goes to the profit of the bank. Both the Fed rate and LIBOR are short-term inter-bank interest rates, but the Fed rate is the main tool that the Federal Reserve uses to influence the supply of money in the U.S. economy. LIBOR is a commercial rate calculated from prevailing interest rates between highly credit-worthy institutions. Our Interest Calculator deals with fixed interest rates only.
Our Interest Calculator above allows periodic deposits/contributions. This is usefully for those who have the habit of saving a certain amount periodically. An important distinction to make regarding contributions is whether they occur at the beginning or end of compounding periods. Periodic payments that occur at the end have one less interest period total per contribution.
Some forms of interest income are subject to taxes, including bonds, savings, and certificate of deposits(CDs). In the U.S., corporate bonds are almost always taxed. Certain types are fully taxed while others are partially taxed; for example, while interest earned on U.S. federal treasury bonds may be taxed at the federal level, they are generally exempt at the state and local level. Taxes can have very big impacts on the end balance. For example, if Derek saves $100 at 6% for 20 years, he will get:
$100 × (1 + 6%)20 = $320.71
This is tax-free. However, if Derek has a marginal tax rate of 25%, he will end up with $239.78 only because the tax rate of 25% applies to each compounding period.
Inflation is defined as a sustained increase in prices of goods and services over time. As a result, a fixed amount of money will relatively afford less in the future. The average inflation rate in the U.S. in the past 100 years has hovered around 3%. As a tool of comparison, the average annual return rate of the S&P 500 (Standard & Poor's) index in the United States is around 10% in the same period. Please refer to our Inflation Calculator for more detailed information about inflation.
For our Interest Calculator, leave the inflation rate at 0 for quick, generalized results. But for real and accurate numbers, it is possible to input figures in order to account for inflation.
Tax and inflation combined makes it hard to grow the real value of money. For example, in the United States, the middle class has a marginal tax rate of around 25% and the average inflation rate is 3%. To maintain the value of the money, a stable interest rate or investment return rate of 4% or above needs to be earned, and this is not easy to achieve.