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Interest Rate

Interest is the cost of money

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Interest is the cost of money and is measured by the interest rate where

interest rate = cost of having money available for use

The interest rate is a percentage that is periodically added to an amount of money over a specified length of time. If money is borrowed the interest rate is the percentage of the borrowed amount that is paid to the borrower as a compensation for the use of the borrowed property.

Interest reflects that

  • money available today has a greater value that money received in the future

The future value of a present amount of value can be expressed as

F = P (1 + i)n                     (1)

where

F = future value

P = present value

i = interest rate per period

n = number of interest periods

Example - Accumulated Value

The accumulated value of an amount of present value 1 today with interest rate 10% in a 10 years period can be expressed as

YearAccumulated Value
0 1
1 1.1
2 1.21
3 1.33
4 1.46
5 1.61
6 1.77
7 1.94
8 2.14
9 2.36
10 2.59

An amount of 500 will accumulate with the factor 2.14 in 8 years - or 

F = 2.14 (500)

  = 1070

Interest Rate - Online Calculator

P - Present value

i - interest rate per period (%)

n - number of periods

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