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These equations solve problems that involve compound interest. With one exception, each kind of problem can be solved immediately, using a well-defined equation. The exception, as Isaac Newton discovered, is that interest computation requires iteration and may result in several solutions. The variables used are:
  • $pv$ (present value) = The starting balance in an account. This number can be zero, positive (when you take out a loan), or negative (when you make a deposit).
  • $fv$ (future value) = The ending balance after the specified number of payment periods ($np$).
  • $np$ (number of periods) = The number of payment periods, usually expressed in months.
  • $pmt$ (payment) = The amount of each periodic payment, usually a negative amount.
  • $ir$ (interest rate) = The per-period interest rate on the account.
These equations are similar to those used to calculate Population Increase , but they allow you to specify interest and payments as separate variables.

An Example

Let's say you want to know how much money you will have in an investment that has an annual interest rate of 12%. The account has a starting balance of $0.00 and you are planning to deposit $100 per month. For the interest rate per period (per month in this case), divide the annual interest rate of 12% by 12 = 1% per month (is this correct?). Result: in 10 years (120 months) you will have a balance of $23,003.87 (click here to test this result with the calculator above).

Equation List

Here are the equations for all the directly computable forms this problem can take, including the variations created by choosing payment-at-beginning and payment-at-end.

Payment at End:

begin{equation} pv = frac{1}{ir,} left(ir, + 1right)^{- np,} left(- fv, ir, - pmt, left(ir, + 1right)^{np,} + pmt,right) end{equation} begin{equation} fv = frac{1}{ir,} left(- ir, pv, left(ir, + 1right)^{np,} - pmt, left(ir, + 1right)^{np,} + pmt,right) end{equation} begin{equation} np = frac{log{left (frac{- fv, ir, + pmt,}{ir, pv, + pmt,} right )}}{log{left (ir, + 1 right )}} end{equation} begin{equation} pmt = - frac{ir, left(fv, + pv, left(ir, + 1right)^{np,}right)}{left(ir, + 1right)^{np,} - 1} end{equation}

Payment at Beginning:

begin{equation} pv = - fv, left(ir, + 1right)^{- np,} - pmt, + pmt, left(ir, + 1right)^{- np,} - frac{pmt,}{ir,} + frac{pmt,}{ir,} left(ir, + 1right)^{- np,} end{equation} begin{equation} fv = frac{1}{ir,} left(- ir, left(pmt, left(ir, + 1right)^{np,} - pmt, + pv, left(ir, + 1right)^{np,}right) - pmt, left(ir, + 1right)^{np,} + pmt,right) end{equation} begin{equation} np = frac{1}{log{left (ir, + 1 right )}} log{left (frac{- fv, ir, + ir, pmt, + pmt,}{ir, pmt, + ir, pv, + pmt,} right )} end{equation} begin{equation} pmt = - frac{ir, left(fv, + pv, left(ir, + 1right)^{np,}right)}{ir, left(ir, + 1right)^{np,} - ir, + left(ir, + 1right)^{np,} - 1} end{equation}

12c Financial Calculator 2.4 2016

When using these equations, be sure to use negative values for owed balances and money paid into the account, positive values for balances in your favor and money withdrawn from the account. For these equations, enter percentages as ratios, thus 8% = 0.08 — yes, the financial calculator at the top of the page accepts percentages as integers, but these equations are more portable and universal in part because they avoid certain kinds of hand-holdy conversions.

There are several boundary conditions implicit in these equations (conditions for which no meaningful result can be obtained). Example: if a payment is chosen that exactly offsets the accrued interest per period and you try to solve for $np$, the computation will fail because there are an infinite number of periods in that case.

Math Notes

Status indicator: There is a status indicator at the bottom of the calculator display to alert you that the computation is not complete. This indicator is meant to remind you that new numbers have been entered but a value button has not yet been pressed, which means the displayed values may not represent a consistent result.

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Interest rate per period: This business of dividing an interest rate by 12 is not mathematically correct, but since banks use the procedure* it's wise to go along, otherwise your numbers will not agree with those of the bank.

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Interest rate ($ir$) computation: The case of $ir$ cannot be solved without iteration (using a method for which we are indebted to Isaac Newton). This calculator solves for $ir$ using an efficient iteration method that will work for most problems, but a multiple-root possibility exists (more than one correct, if meaningless, result). If a particular problem will not yield an interest rate or produces a meaningless rate, you may want to try typing an estimate of the correct rate in the interest rate display window and pressing the '$ir$' button again.

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