Financial Modeling Tutorials

- Excel Modeling
- Financial Functions in Excel
- Sensitivity Analysis in Excel
- Sensitivity Analysis
- Capital Budgeting Techniques
- Time Value of Money
- Future Value Formula
- Present Value Factor
- Perpetuity Formula
- Present Value vs Future Value
- Annuity vs Pension
- Present Value of an Annuity
- Doubling Time Formula
- Annuity Formula
- Present Value of an Annuity Formula
- Future Value of Annuity Due Formula
- Maturity Value
- Annuity vs Perpetuity
- Annuity vs Lump Sum
- Deferred Annuity Formula
- Internal Rate of Return (IRR)
- IRR Examples (Internal Rate of Return)
- NPV vs XNPV
- NPV vs IRR
- NPV Formula
- NPV Profile
- NPV Examples
- Advantages and Disadvantages of NPV
- Mutually Exclusive Projects
- PV vs NPV
- IRR vs ROI
- Break Even Point
- Break Even Analysis
- Breakeven Analysis Examples
- Break Even Chart
- Benefit Cost Ratio
- Payback Period & Discounted Payback Period
- Payback period Formula
- Discounted Payback Period Formula
- Payback Period Advantages and Disadvantages
- Profitability Index
- Feasibility Study Examples
- Cash Burn Rate
- Interest Formula
- Simple Interest
- Simple Interest vs Compound Interest
- Simple Interest Formula
- CAGR Formula (Compounded Annual Growth Rate)
- Growth Rate Formula
- Effective Interest Rate
- Loan Amortization Schedule
- Mortgage Formula
- Loan Principal Amount
- Interest Rate Formula
- Rate of Return Formula
- Effective Annual Rate
- Effective Annual Rate Formula (EAR)
- Compounding
- Compounding Formula
- Compound Interest
- Compound Interest Examples
- Daily Compound Interest
- Monthly Compound Interest Formula
- Discount Rate vs Interest Rate
- Discounting Formula
- Rule of 72
- Geometric Mean Return
- Geometric Mean vs Arithmetic Mean
- Real Rate of Return Formula
- Continuous compounding Formula
- Weighted average Formula
- Average Formula
- EWMA (Exponentially Weighted Moving Average)
- Average Rate of Return Formula
- Mean Formula
- Mean Examples
- Population Mean Formula
- Weighted Mean Formula
- Harmonic Mean Formula
- Median Formula in Statistics
- Range Formula
- Outlier Formula
- Decile Formula
- Midrange Formula
- Quartile Deviation
- Expected Value Formula
- Exponential Growth Formula
- Margin of Error Formula
- Decrease Percentage Formula
- Relative Change
- Percent Error Formula
- Holding Period Return Formula
- Cost Benefit Analysis
- Cost Benefit Analysis Examples
- Cost Volume Profit Analysis
- Opportunity Cost Formula
- Opportunity Cost Examples
- APR vs APY
- Mortgage APR vs Interest Rate
- Normal Distribution Formula
- Standard Normal Distribution Formula
- Normalization Formula
- Bell Curve
- T Distribution Formula
- Regression Formula
- Regression Analysis Formula
- Multiple Regression Formula
- Correlation Coefficient Formula
- Correlation Formula
- Correlation Examples
- Coefficient of Determination
- Population Variance Formula
- Covariance Formula
- Coefficient of Variation Formula
- Sample Standard Deviation Formula
- Relative Standard Deviation Formula
- Standard Deviation Formula
- Standard Deviation Examples
- Effect Size
- Sample Size Formula
- Volatility Formula
- Binomial Distribution Formula
- Multicollinearity
- Hypergeometric Distribution
- Exponential Distribution
- Central Limit Theorem
- Poisson Distribution
- Central Tendency
- Hypothesis Testing
- Gini Coefficient
- Quartile Formula
- P Value Formula
- Skewness Formula
- R Squared Formula
- Adjusted R Squared
- Regression vs ANOVA
- Z Test Formula
- Z Score Formula
- Z Test vs T Test
- F-Test Formula
- Quantitative Research
- Histogram Examples

Related Courses

**Interest Formula (Table of Contents)**

## What is Interest Formula?

The term “interest” refers to the amount that a borrower is obligated to pay or a depositor is supposed to earn on a principal sum at a pre-determined rate, which is known as the rate of interest. The formula for interest can be derived by multiplying the rate of interest, the outstanding principal sum and the tenure of the loan or deposit.

Mathematically, Interest Equation is represented as,

**Interest = P * r * t**

where,

- P = Outstanding principal sum
- r = Rate of interest
- t = Tenure of loan / deposit

In case of periodic interest payment (such as monthly, quarterly, etc), the formula for interest payment can be derived by multiplying the rate of interest and the outstanding principal sum and then dividing the result by the number of periodic payments during the year.

Mathematically, Interest Payment is represented as,

**Interest = P * r / N**

where,

- P = Outstanding principal sum
- r = Rate of interest
- N = Number of periodic payment per year

### Interpretation of the Interest Formula

The formula for the calculation of interest can be derived by using the following steps:

**Step 1: **Firstly, figure out the outstanding principal sum of the loan or deposit and it is denoted by ‘P’. Please keep in mind that the outstanding principal is the balance at the beginning of the year.

**Step 2: **Next, figure out the rate of the interest rate for the given loan or deposit which is denoted by ‘r’.

**Step 3:** Next, figure out the tenure of the loan or deposit and it is denoted by ‘t’. The tenure of the facility is the number of years remaining until its maturity.

**Step 4:** Finally, the formula for interest can be derived by multiplying the outstanding principal sum (step 1), the rate of interest (step 2) and the tenure of the loan or deposit (step 3) as shown below,

4.9 (1,067 ratings)

**Interest = P * r * t**

### Examples of Interest Formula (with Excel Template)

Let’s see some simple to advanced examples of interest equations to understand it better.

#### Example #1

**Let us take an example Trevor who has deposited his money at the ABC Bank Ltd. As per the bank policy, Trevor has been offered an interest rate of 6% on a sum of $1,000 that has been deposited for a period of 3 years. Calculate the interest to be earned by Trevor at the end of 3 years.**

**Solution:**

Given,

- Outstanding principal sum, P = $1,000
- Rate of interest, r = 6%
- Tenure of deposit, t = 3 years

Use the following data for the calculation of interest.

The interest earned by Trevor can be calculated using the above formula as,

Interest = $1,000 * 6% * 3

Interest will be –

**Interest = $180**

Therefore, Trevor will earn an interest of $180 at the end of 3 years.

#### Example #2

**Let us take another example of Smith who has borrowed a sum of $5,000 from XYZ Bank Ltd for a period of 3 years. The rate of interest charged for the facility is 8% and the loan has to be repaid in 6 equal half-yearly payments of $954. Calculate the interest to be paid by Smith at the end of 1 ^{st} year, 2^{nd} year and 3^{rd} year.**

**Solution:**

Given,

- Outstanding principal sum, P = $5,000
- Rate of interest, r = 8%
- Number of payments per year, N = 2
*(*since half-yearly payments*)*

Use the following data for calculation of interest charged for 1st six months.

So, calculation of interest charged for 1st six months can be done as follows –

Interest Charged for 1st Six Months = $5,000 * 8% / 2

Interest Charged for 1st Six Months will be –

**Interest Charged for 1st Six Months = $200**

Calculation of Outstanding Principal Sum after 1^{st} Six Months will be –

Outstanding Principal Sum after 1^{st} Six Months will be –

Outstanding principal sum after 1^{st} six months = $5,000 – ($954 – $200)

**Outstanding Principal Sum after 1 ^{st} Six Months = $4,246**

Similarly, we can do the calculation of outstanding principal and interest charged for months 1 to 5.

### Interest Formula Calculator

You can use the following Interest Formula Calculator

P | |

r | |

t | |

Interest | |

Interest = | P x r x t | |

0 x 0 x 0 = | 0 |

### Relevance and Uses

The calculation of interest is an important concept to understand because it is an indispensable part of the income statement of any company. It can either impact the income side in the form of interest earned on an investment or affect the cost in the form of interest expense charged on the debt. As such, a company should employ adequate resources for settling down on the interest of both invested (return on investment) and borrowed funds (cost of the fund) in order to manage the financial performance efficiently.

### Recommended Articles

This has been a guide to Interest Formula. Here we learn how to calculate interest using its formula along with practical examples, calculator and downloadable excel template. You can learn more about financial analysis from the following articles –

- Discounting Formula Explanation
- Return On Investment (ROI) Definition
- Calculate Nominal Interest Rate
- Formula of Nominal Interest Rate
- Formula of Compound Interest
- Formula of Simple Interest

- 250+ Courses
- 40+ Projects
- 1000+ Hours
- Full Lifetime Access
- Certificate of Completion