Finance Interest megaConverter #23
INFORMATION PAGE

Introduction and Overview
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Financial calculations rely on the concept of interest payments and reinvestment. Interest varies with market forces and economic policies of governments. The investor wants high interest rates. The borrower wants low interest rates. Many simple investments have rates that can fluctuate dramatically from year to year. Many investment strategies attempt to smooth out these fluctuations by investing in fixed interest vehicles like bonds and mortgages. Other strategies, like mutual funds, create an artificial rate of return by buying and selling investments to provide a return greater than the normal interest rates.

This converter assumes a consistent rate like bonds and mortgages. Many people who invest for long term return rely on stable investments so they don’t need to worry about the effects of economic downturn. If this is what you invest in, you can use this converter to determine what you need to invest, when you need to invest it, so that you will wind up with the value you need in the future.

For more information on interest and finance see any college accounting or economics book.

* Much of our written history still refers to things in common units. The Bible does not refer to meters or kilograms, but to cubits and stadia, or shekels and drachma. Wouldn't it be nice to know what they were talking about way back then? Now you can use megaConverter! For a more complete listing of ancient, foreign, and obsolete measures, download our 'megaSpreadsheet' of conversions in MS Excel format.

Glossary of Conversions:

Payments Per Term
If you can only afford to pay this amount in monthly payments, what can you afford to borrow today, or if you contribute this amount to your children’s college fund, how much will you have when they actually go to college.

Present Value
This is what your investment today will be worth in the future, or if you take a loan of this size, what will your annual payments be in order to pay this off in so many years.

Future Value
If you need this amount when you retire, what will you need to invest today to get it, or if you know what your child’s college tuition will be when they get that old, how much will you need to set aside each year.

Nominal Interest
This is the simple, term interest, calculated as a percent of the amount, with no compounding. The term can be any length, but the interest rate is only for the term. As an example, if the annual rate of interest is 6%, the monthly rate is 0.5%. $100 borrowed for one month would have a repayment of 100*(1+.005) or $100.50. If the annual rate were 18%, the monthly rate would be 1.5% and the repayment after one month would be 100*(1+.015) or $101.50. If you kept the money for a year the repayment would be 100*(1+.18) or $118. Click the radio button by the input field to use this interest type in your calculations.

Quarterly Compounding
If the interest you pay or receive is calculated and paid out every fourth of the term (such as every three months for an annual term), the effective annual interest is greater than the nominal interest. If you borrow $100 for a year at 18% compounded quarterly, the repayment is calculated as 100*(1+.18/4)* (1+.18/4)* (1+.18/4)* (1+.18/4) or $119.25, which is more than the rate at simple interest. To make the converter work right, you would enter 18 in the nominal interest field and then click the radio button next to "Cmpd Quarterly". The "% Effective Interest" value is the rate value that would give you the same return if it were the nominal rate.

Daily Compounding
If the interest you pay or receive is calculated and paid out every day of an annual term investment or loan, the effective annual interest is greater than the nominal interest. If you borrow $100 for 2 years at 18% compounded quarterly, the repayment is calculated as 100*(1+.18/365)^(365*2) or $143.32, which is quite a bit more than the rate at simple interest. To make the converter work right, you would enter 18 in the nominal interest field and then click the radio button next to "Cmpd Daily". The "% Effective Interest" value is the rate value that would give you the same return if it were the nominal rate.

Continuous Compounding
In many cases the interest you pay or receive is calculated and paid out continuously throughout the investment or loan, and the effective annual interest is greater than the nominal interest. If you borrow $100 for 2 years at 18% compounded continuously, the repayment is calculated as 100*e^(.18*2) or $143.33, which is quite a bit more than the rate at simple interest. To make the converter work right, you would enter 18 in the nominal interest field and then click the radio button next to "Cmpd Continuously". The "% Effective Interest" value is the rate value that would give you the same return if it were the nominal rate. You might note that this value is very close to the daily rate. Continuous compounding starts to make a significant difference at very high interest rates, but is intended mostly as a bookkeeping aid for investments that change hands rapidly.

Note: Because of round-off errors, converting from very large units to very small units or vice-versa may not be accurate (or practical). Conversion factors can be found by converting a quantity of 1 unit to another unit several steps above or below the first. You may need to string several conversion factors together to find the factor from a very large unit to a very small unit, and then you can use a calculator with sufficient digits to find your answer.