Interest Rate

Overview

Engineering reference data for Interest Rate in economics.

Key Formulas

Present Value

$PV = \frac{FV}{(1+r)^n}$

Discount a future value to present.

Net Present Value

$NPV = \sum_{t=0}^{n} \frac{C_t}{(1+r)^t}$

Sum of discounted cash flows.

Compound Interest

$FV = PV(1+r)^n$

Future value with compound interest.

Variables

Data Tables

Accumulated Value Year by Year

Future Value of Present Money by Interest Rate

Additional Formulas

Future Value with Unknown Interest Rate

To find the interest rate required for a present value $P$ to grow to a future value $F$ over $n$ compounding periods:

$i = \left(\frac{F}{P}\right)^{1/n} - 1$

Example: A payment of $100 today grows to$120 in 5 years:

$i = \left(\frac{120}{100}\right)^{1/5} - 1 = 0.037 = 3.7\%$

Key Concepts

Time Value of Money

Interest reflects the fundamental principle that money available today has a greater value than money received in the future. This is because:

• Money today can be invested to earn returns
• Inflation reduces purchasing power over time
• Uncertainty exists about future payments

Interest Rate Interpretation

• When borrowing: The interest rate is the percentage paid to the lender as compensation for use of borrowed funds
• When investing: The interest rate represents the return earned on capital deployed
• Interest is calculated periodically and added to the principal amount

Interactive Charts

References

• Original Source