How can i calculate my interest rate

Interest on interest—also referred to as compound interest—is the interest earned when interest payments are reinvested. Compound interest is used in the context of bonds. Coupon payments from bonds are assumed to be reinvested at some interest rate and held until the bond is sold or matures.

Compound interest refers to the interest owed or received on an investment, and it grows at a faster rate than simple interest.

Key Takeaways:

• Interest on interest is the interest earned when interest payments are reinvested, particularly in the context of bonds.
• This is also known as compound interest, or compounding.
  
• Compound interest grows at a faster rate than basic interest, and it will be fastest when compounding periods are most frequent.
• Simple interest, in contrast, only credits the original amount of principal.
• Coupon payments from bonds can be reinvested at some compound interest rate and held until the bond is sold or matures. Dividends can also be reinvested to compound stock returns.

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Compounding: My Favorite Term

How Interest on Interest Works

Interest on interest works, as the term implies, by paying interest on past interest payments received as well as on the initial amount of principal invested or saved.

For example, U.S. Savings bonds are financial securities that pay interest on interest to investors with interest that compounds semi-annually and accrues monthly every year for 30 years. Most savings accounts at banks also pay interest on interest, with payments compounded on a monthly basis.

Interest on interest differs from simple interest. Simple interest is only charged on the original principal amount while interest on interest applies to the principal amount of the bond or loan and to any other interest that has previously accrued.

How to Calculate Interest on Interest

When calculating interest-on-interest, the compound interest formula determines the amount of accumulated interest on the principal amount invested or borrowed. The principal amount, the annual interest rate, and the number of compounding periods are used to calculate the compound interest on a loan or deposit.

The formula to calculate compound interest is to add 1 to the interest rate in decimal form, raise this sum to the total number of compound periods, and multiply this solution by the principal amount. The original principal amount is subtracted from the resulting value.

Compound interest:

The "rule of 72" estimates the number of years it will take for the value of an investment or savings to double when there is interest on interest. Divide the number 72 by the interest rate to get the approximate number of years.

Example

For example, assume you want to calculate the compound interest on a $1 million deposit. The principal is compounded annually at a rate of 5%. The total number of compounding periods is five, representing five one-year periods.

The resulting compounded interest on the deposit is as follows:

What Is Interest on Interest?

Interest on interest refers to an investment or deposit whereby interest that has been credited in the past is also used for calculating future interest payments. Because interest on interest compounds over time, it can grow exponentially as time passes.

What Is Another Name for Interest on Interest?

Interest on interest is also known as compound interest, or simply as compounding.

What Is Interest?

Interest refers to payments made on investments, loans, or deposits. In particular, interest is payment received due to the opportunity cost of lending, depositing, or investing money to somebody else rather than utilizing yourself over some period of time. The greater the time period or the greater the perceived risk involved with handing over your money, the higher the rate of interest required. Interest may, therefore, be thought of as the "cost of money" or the cost of the "time value of money."

Find out what interest rate, effective rate, APY or APR you're receiving on your credit card, loan, mortgage, savings or investment using this interest rate calculator. Note that interest is compounded monthly.

What is my interest rate?

Use our interest rate calculator to work out the interest rate you're receiving on credit cards, loans, mortgages or savings. An interest rate is a percentage that is charged by a lender to a borrower for an amount of money. This translates as a cost of borrowing. You may be borrowing the money from someone (loan) or lending it to them (savings or investment).

For common types of savings accounts and investments, you may be earning compound interest on your balance. This means that interest is calculated based upon your initial principal plus the interest already earned.

When calculating the interest rate you're receiving, you therefore have to compound the nominal interest rate to find an effective rate that includes the compounding. Of course, there may be some occasions where you may be loaning money, or receiving money, on the basis of a simple interest investment, without compounding. This means that interest is only calculated on the balance, not on the previously acrued interest.

What interest rate am I paying on my loan?

Calculating the interest rate you're receiving on your credit card or loan requires a series of loan calculations involving your initial loan amount, number of payments made and either the monthly payment or interest paid.

Our calculator uses the Newton-Raphson method to calculate the interest rates on loans. This is a complex process resulting in a more accurate interest rate figure. The Newton-Raphson method chooses a series of values to try, and then converges on the answer once the equation balances.

Whether you've taken out a mortgage or loan, it can be difficult to decipher the interest rate you're paying on it. That's where our calculator steps in, giving you a clear indication of what you may be paying. Note that our interest rate calculator uses monthly compounding.

If you'd like to use a spreadsheet to calculate your interest, give this simple loan calculator spreadsheet from Vertex42 a try.

What interest rate am I receiving on my investment/savings?

To calculate the rate of return on an investment or savings balance, we use an adapted version of the compound interest formula that we've featured in many of our calculators. We enter into the formula your current balance, original principal amount, number of compounds per year and time period and the formula gives us a resulting interest rate.

It's worth noting that we also have other options for investments involving calculation of future values and returns. Should you wish to work out the rate of interest you've received on an investment based upon a current and future value, you can use our calculator for compound annual growth rate. If you're wondering how much money you might stand to make from a future investment, try calculating the internal rate of return.

What is the nominal interest rate?

Nominal interest rate is the interest rate figure before an adjustment for inflation is taken into account. The formula for nominal interest rate is:

Nominal interest rate = n × ( (1 + r)1/n - 1)

r = effective interest rate
n = number of compounding periods

What is the effective interest rate?

The effective annual rate is the interest rate earned on a loan or investment over a time period, with compounding factored in. It can also be referred to as the annual equivalent rate (AER) or APY.

To give an example, a 5% annual interest rate with monthly compounding would result in an effective annual rate of 5.12%. This is because monthly interest is effectively accrued on top of previous monthly interest. The more times interest is compounded within the time period, the higher the effective annual rate will be.

Effective interest rate = (1 + (i/n) )n - 1

i = nominal interest rate
n = number of periods

What is the APR for my loan?

The Annual Percentage Rate (APR) includes the setup fee charged by your lender as part of your overall interest calculation, averaged over 12 months. It can give an indication of exactly how much your mortgage, vehicle loan or fixed rate loan is costing you.

To learn more about the types of interest rates referenced in the calculator, read our article about the differences between nominal, effective and APR interest rates.

Note: The interest rate calculator is provided for information purposes only. Please speak to an independent financial advisor for any kind of advice on loans.