If you ever thought that the role of the mathematics subject in our life is over then you could be quite wrong about this thought because of compound interest formula . Today all calculations for mortgages and loans are all done through compound interest formula.
Compound interest is compounded annually, quarterly and monthly. Unlike the simple interest formula where you simply multiply the Principal with the rate of interest and the time span in years and you get the interest value separately. This is then added to the principal to see what the total value is. In case of compound interest formula, the total amount is got is the sum plus the interest. Here if you need to identify the interest component alone then you will have to subtract the principal from the total amount to get this.
The compound interest formula is given by
CI= P (1+(R/100)) t.
CI stands for Compound Interest,
P stands for the principal value on which the interest is being calculated,
R is the rate of interest and
t is the time for which the value is calculated.
In general terminology- we should notice that the R is always taken as Rate of Interest annually and the t is the tenure in years. So if you are calculating this in months or if the rate of interest is monthly then the formula should be modified accordingly.
As discussed before the tenure is always expressed in the form of years so if you are trying to calculate it for say 8 months then you should be using 0.67 instead of 1 for the tenure of the investment or loan. Same applies for the rate of interest as well. If the rate of interest is provided quarterly then the R would be replaced by R/4.
Though you might be thinking that this is a small thing and is not of much importance then it is suggested that you give a peep into the world outside where almost all financial calculations for interest are performed using the Compound Interest formula.