Albert Einstein once called compound interest 'the greatest mathematical discovery of all time'. When you invest money you earn interest on the capital that you invest. The next year you earn interest on both your original investment and the interest earned in the previous year. Each year thereafter, you earn interest on your capital and the interest that the capital earned. Earning interest on your interest and not just your capital investment is the miracle of compound interest.
- Present Value -- Given the Payment, Interest Rate, Duration and
Ending Value, how much do I need to as a (Beginning Value) today?
- Payment -- Given the Beginning Value, Interest Rate, Duration,
Ending Value and Payment Mode, how much do I have to deposit starting today?
- Interest Rate -- Given the Beginning Value, Payment, Duration and
Ending Value, what nominal interest rate will I have to earn?
- Time Period [Years and Months] -- Given the Beginning Value, Payment,
Interest Rate and Ending Value, how long will it take if I start today?
- Ending Value -- Given the Beginning Value, Payment, Interest Rate and Duration, how much will I accumulate (Ending Value)?
Calculation Type - Present Value calculations typically occur on a mortgage, a loan or an immediate annuity that makes payments to you. Ending Value calculations would typically be associated with saving plans for retirement or other periodic investment deposits.
Timing of Payments - Payments can occur at the beginning of each payment period or at the end of each payment period. For example, a residential mortgage (and most other loans) typically have a payment that occurs at the end of each payment period.
Payment Mode - Select the appropriate payment mode.
Interest Compounding Periods - Select the number of times per year that interest is compounded. If interest is compounded only once per year, then the Nominal Rate and the Annual Percentage Rate will be equal.
Beginning Value - The initial or starting value. This would also be the mortgage or loan balance.
Modal Payment - Enter the payment amount. For $100 per month, enter 100 and set the payment mode to monthly.
Interest Rate - The Annual Percentage Rate takes into account the frequency of interest compounding. Most mutual funds, Certificates of Deposit, etc. state interest as an Annual Percentage Rate. Most mortgage loans state the Nominal Interest Rate. The Annual Percentage Rate is typically on the loan disclosure form. For example, a 6.5% Nominal Interest Rate with interest compounded monthly results in a 6.6972% Annual Percentage Rate. If interest is compounded once per year, the Nominal Rate and the Annual Rate are equal.
Duration - Select the appropriate number of years/months in the plan.
Ending Value - The amount that I want to have in the future. For a mortgage of loan, this would typically be zero or the amount of the balloon payment due at the end of a stated number of years.