Math Is Fun Forum

Bob

Administrator

Registered: 2010-06-20

Posts: 10,143

compound interest: how to calculate it

hi bobbym,

There have been several posts about compound interest recently and the latest seems to be kicking up a variety of answers so I've been researching the problem.

I didn't want to add this to the existing thread as that would just add confusion for the poor OP.

http://www.mathsisfun.com/money/compound-interest-periodic.html

and

http://en.wikipedia.org/wiki/Compound_interest

have helped me to get a better understanding of what's going on.

Periodic compounding (where you divide a quoted rate into separate calculations eg. 6% per year  becomes 0.5% per month) doesn't occur in the UK.  At least, not to my knowledge; someone may correct me on this.)  It is a requirement under UK law that lenders and saving institutions must always give the APR (annual percentage rate) or EAR (effective annual rate) so that people can compare rates and are not misled into a bigger debt than anticipated.

I think I'm right in saying that in the US,  mortgage companies can quote a yearly rate (let's say 6%), compound monthly at 0.5% and thus you end up being charged 6.16(778118645..)% over each year!  This wouldn't be allowed in the UK!

The site http://illuminations.nctm.org/ActivityDetail.aspx?id=172 does this.  Try putting in P= 100, MC = 0, AIR = 6, length = 1 year and you'll see what I mean.  Even more confusing is what it does with P= 100, MC = 100, AIR = 6, length = 1 year.

Trouble is none of the recent posts makes it clear what is actually wanted.  If the question just says 6%, and nothing more, then there are at least three ways of interpreting this, all leading to different answers.

see also

http://en.wikipedia.org/wiki/Annual_percentage_rate

Don't know if any of that helps, but I hope so.  If it is 'as clear as mud' then let's leave the mud in the sun to form bricks and build another pyramid! 

(Guess where I went on holiday recently)

Bob

Last edited by Bob (2011-04-14 19:12:59)

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Children are not defined by school ...........The Fonz
You cannot teach a man anything;  you can only help him find it within himself..........Galileo Galilei
Sometimes I deliberately make mistakes, just to test you!  …………….Bob

survival

Member

Registered: 2011-04-03

Posts: 655

Re: compound interest: how to calculate it

i hope u had a good time. i have not taken vacations in yrs.

bobbym

bumpkin

From: Bumpkinland

Registered: 2009-04-12

Posts: 109,606

Re: compound interest: how to calculate it

Hi Bob;

These have all been difficult posts. Little explanation, no feedback. A lot of hurrying to meet deadlines, it does not lead to high quality work.

I know in the US how they compound interest on savings. I do not know where their teachers get that 6% from. No bank here is giving that. You have raised a good point about doing that on loans. I do not know whether that is legal here.

I know you have been in Egypt and you obviously have had a good time. Maybe I misread your comment about the sharpening of razor blades and pyramids. I thought you were alluding to the orgone.

Hi survival;

i have not taken vacations in yrs.

Do you not get a vacation every year from school?

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In mathematics, you don't understand things. You just get used to them.
If it ain't broke, fix it until it is.
Always satisfy the Prime Directive of getting the right answer above all else.

Bob

Administrator

Registered: 2010-06-20

Posts: 10,143

Re: compound interest: how to calculate it

hi bobbym,

I had only read about a vague connection between pyramids and razor blades so I had to look up orgone.

Phew!  I'd have been more careful with the post if I'd known all that before.

On our tour we had a brilliant Egyptologist, Professor Hassan Khalil, as our guide around the Pyramids, tombs and temples along the Nile.  He was very knowledgeable, with a clarity of presentation and a wicked sense of humour.  Those Pyramids are all 'Stairways to Heaven', directly from the translation of the hieroglyphics pyr = 'house of'  Ra = 'sun god', mid = 'stairway'.  So maybe you couldn't sharpen your razors that way.  But you'd certainly sharpen your knowledge of one of the earliest civilisations.

At one time, to stay eligible as Pharaoh (= 'great house'), he had to run a certain distance unaided and then wrestle an ox.  What do you think about making this a rule for modern Presidents ( prime ministers)?

Has the Sun come up yet for you?  The boat that carries it across the sky has lifted up above the horizon here in Essex, so it's on its way!

As for having vacations:  my wife and I were state employed teachers so we didn't have much time or money to go touring.  Now we have retired we're determined to make the most of it by catching up on what we've missed.  (While the money, and our health, lasts!)

Bob

Last edited by Bob (2011-04-14 19:55:52)

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Children are not defined by school ...........The Fonz
You cannot teach a man anything;  you can only help him find it within himself..........Galileo Galilei
Sometimes I deliberately make mistakes, just to test you!  …………….Bob

bobbym

bumpkin

From: Bumpkinland

Registered: 2009-04-12

Posts: 109,606

Re: compound interest: how to calculate it

Hi Bob;

I have not heard of Khalil, I have seen Zahi Hawass many times on TV.

I do not think that our elected officials qualify, although they can really throw the bull, I do not see them wrestling an ox.

No sun yet here. As for vacations you are entitled. Enjoy them.

---

In mathematics, you don't understand things. You just get used to them.
If it ain't broke, fix it until it is.
Always satisfy the Prime Directive of getting the right answer above all else.