Compound interest is the interest you earn not just on your original investment but also on the income accrued from that investment. You can calculate compound interest in a number of ways using financial calculators, online calculators or spreadsheets. You require the principal amount, simple interest rate and the period of interest in months or years to calculate compound interest amount.
Calculate the common ratio using the interest rate or the rate of return. On the calculator you first divide the interest rate by 100 and then add 1 to the to obtained value. For instance, if your interest rate is 4 percent, then the common ratio is (4/100+1)= 1.04. Similarly, if the interest rate is 15 percent, the common ratio would be (15/100 + 1)= 1.15.
Calculate the compound ratio using the common ratio. The compound ratio would be the common ratio to the power of the number of years or months. For instance, if you're calculating the compound interest for a five-year fixed deposit with a simple interest rate of 5 percent, the common ratio will be (5/100 +1) = 1.05. The compound ratio will be 1.05 to the power of 5, which is 1.34. On a scientific calculator there is a tab with symbol "X to the power of Y," which you can use to calculate the power values. In the example X equals 1.05, Y equals 5.
Calculate the total accrued amount. The total accrued amount will be the original investment or principal amount plus the amount earned on interest. You can multiply the principal amount with the obtained compound ratio value to calculate the total accrued amount using the example from Step 2. Say the original fixed deposit amount is $10,000 and the compound ratio is 1.34. The total accrued amount in five years will be (10,000 X 1.34) which equals to $13,400.
Calculate the compound interest amount. Subtract the total amount accrued minus the principal amount to obtain amount earned on compound interest. Revisiting the example in Step 3, the amount earned on the compound interest will be $13,400 minus $10,000, which equals $3,400.
If you're calculating the compound interest for a period less than one year, then you'll have to divide the number of months by 12 before calculating compound ratio. For instance, if your common ration is 1.05 for six months. Then the compound ratio will be 1.05 to the power of 0.5, since 6/12 equals 0.5.
- If you're calculating the compound interest for a period less than one year, then you'll have to divide the number of months by 12 before calculating compound ratio. For instance, if your common ration is 1.05 for six months. Then the compound ratio will be 1.05 to the power of 0.5, since 6/12 equals 0.5.
Kiran Bharthapudi has more than seven years of experience in print, broadcast and new media journalism. He has contributed to several major news agencies, including United Nations radio, BBC online and "Consumer Reports" magazine. His articles specialize in the areas of business, technology and new media. He has a Ph.D. in mass communications.