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Math can be a real challenge and not everyone understands the concepts at once. Interest rates are not one of the easiest topics but neither do they require a master’s degree. Don’t be afraid of this topic! This article will help you learn how to calculate interest rate in easy steps.
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Step One: The Basics
Basic interest rate calculation is really easy. You only need the following numbers:
- Principal (the amount of money you have to begin with) = P
- Interest (the interest earned after n years) = I
- Time (in years) = n
- Simple interest rate per year = i
- Maturity Value (principal + interest) = S
The simple interest rate per year i needs to be multiplied with 100 to get the percentage i%.
Example: i=0.1 would be 10% (0.1*100=10)
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Step Two: Single out i
The standard formula is
How do we get that formula? It’s easy. The maturity value S is the principal plus the interest earned, thus S=P+I. To calculate the interest I, we need to multiply the principal P with the number of years n and the interest rate i: I=P*n*i.
Now let’s have a closer look at the standard formula. First of all, we need to get rid of these brackets:
We want to get i singled out. It’s not that difficult. Let’s do it step by step.
- S=P+P*i*n │-P
- S-P=P*i*n │/n
- (S-P)/n=P*i │/P
- We subtract P on both sides to get rid of the single P on the right side.
- We divide both sides by n.
- We divide both sides by P.
- Now we have singled out i on the right side.
It’s not that difficult, is it?
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Step Three: An Example
Once we have the correct formula, we can try it out with an example.
You have 100 dollars and want to save it until you have 120 dollars because you want to buy a new gadget which will be released in two years. The question is: Which percentage of interest do you need to get 120 dollars within two years?
Now, we have the principal P = 100 dollars, we have the maturity value S = 120 dollars and we have the time in years n = 2. When we insert the numbers into our formula, we get
- To get the percentage, we only have to multiply i with 100, so we get 0.1*100=10%.
We have to save our 100 dollars with an interest rate of 10 % to get 120 dollars after two years.
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You see, it isn’t difficult to learn how to calculate interest rate. You only have to learn the formula and the meaning of the formula parts. When you get an exercise, read it carefully and write down the numbers and the corresponding formula parts. Then you only have to fill the numbers into the formula and to calculate the equation.