This compound interest worksheet will help you understand how to compute Compound Interest on various compounding duration. Compound Interest is just like the simple interest charged by banks on loans but in here the lender and borrower agree to multiply a given unit of principal amount over a certain period say 30 years, half a year, quarter etc. to settle the outstanding balance of the previous account. It is the most familiar way for banks to compute the interest rate over a long period of time to establish the equilibrium of their capital and financial position. And this calculation is done monthly or in any other frequency that is convenient to both the parties.
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Compound interest worksheet helps banks to determine the annual interest rates for different amounts of principal borrowed. The values of interest rates presented in the tables are the result of mathematical algorithm based on the balance sheet, the operating balance, and reinvestment rate of the company. Compound interest rates may be quoted as an Annual Percentage Yield (APY), Annual Percentage Rate (APR) or even Fixed-Compound Interest Rate (FCIR). All these factors are necessary for calculating the compound interest rates.
As discussed above the formula for calculating interest rates involves lots of factors such as balance sheet, the creditworthiness of the borrower, capital, maturity of the loan and interest rates of the federal funds. Some bank’s internal pricing and sorting procedures also affect the interest rates of the loans. That is why most of the Compound Interest Worksheet prepared by the banking institution uses 30 years of compounded interest rates as the starting point. Using this starting point will help you in computing different types of interest rates.
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The more compound you are the higher will be the compounding effect. Thus, the more compounded the amount of interest rates the higher will be the interest amount that you can earn. Compound interest is not only for Interest Only Loans but also for Fixed Rate Loans as well.
On the other hand, if you use the fixed compounding interest rates, then your return from the loan will be lower than the fixed interest rates, but there is no change in the payment structure. This only means that you will have to pay the same interest rates throughout the term of the loan irrespective of the type of loan that you opt for. So if you choose a variable interest rate loan then the compound interest worksheet calculation would give you a lower number of interest rates, but it will not affect the payment structure. However, if you opt for an interest only loan then you would have to pay a fixed rate for the duration of the loan, but the amount of the interest that you will earn will be the same throughout the life of the loan.
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For a loan, you must calculate the Annual Percentage Yield (APY) before you go ahead with the loan application. Compound interest worksheet enables you to do this calculation as well. However, if you choose to apply for a loan using the adjustable rate mortgage then you will have to add the interests that you would pay on the principal loan balance to the amount that you borrow and therefore the APY will also be determined based on the amount of the loan that you opt for. In such a scenario, the compounding effect works both ways. You earn more interest and pay less interest and you can end up paying off the loan sooner than the loan may be possible if you had used a fixed interest rate loan.
The most important component of the compound interest worksheet is the term of the loan. The longer the term of the loan, the higher will be the compounding effect and the more interest you will have to pay over a longer period of time. If you have fixed interest rates then your compounding effect will be lower if you take a long-term loan. However, if you are taking an adjustable interest rate loan, then your compounding effect will be higher. Therefore, you should always try to find a formula that gives you the results you want so that you can calculate your payments properly without being cheated.
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Compound interest is an integral part of the compound interest and you should know how to use it to your advantage. However, if you do not wish to use it in your calculation, then you should make sure that you have already made your calculations correctly in the spreadsheet. A little mistake in any calculation could cost you a lot because compound interest worksheet provides you with the results only after you have multiplied your interest rates and the period of time involved in the repayment. This is why it is very important that you have a Compound Interest Worksheet in place so that you do not have to do the calculations manually. The best way to find out how compound interest works is to download a worksheet from the internet that you can use. You will be able to determine the interest that you would earn if you were to lend money under various conditions.
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