How To Calculate FD Interest?

A Fixed Deposit (FD) is the most popular option for investors looking to make long-term investments. While a fixed deposit is a favored financial option, it is important to know how much interest you will earn throughout the investment.

In this article, we will look at how to calculate FD interest rate

How Does FD Work?

Banks and non-banking financial corporations (NBFC) provide their clients with investment options such as fixed deposits, or FDs.

A fixed deposit (FD) allows investors to invest a set amount of money at a predefined interest rate for a set length of time. Although interest rates differ amongst banking institutions, they are often higher than those on savings accounts. Fixed deposits can be taken out for various durations, from extremely short ones (7–14 days) to long ones (10 years).

A fixed deposit is also known as a term deposit.

Types Of Interests Available

Interest computed on both the original principal and the interest accrued over prior periods is known as compound interest.

Simple interest is interest that is computed solely on the original principal and does not account for interest that has accrued over time.

Banks typically use compound interest to determine the interest on loans and deposits.

What Is Compound Interest?

Interest on interest is referred to as compound interest. Compounding is the process of earning interest on both the principal and any prior interest gained. You are only paid interest on the principal amount with a basic interest account. Interest can be earned on top of the principal amount as well as any prior interest in an account that offers compound interest.

How To Calculate Interest?

Interest can be calculated using simple formulae.

Simple Interest Calculation

Simple Interest(SI) = P*T*R/100, where

P = Principal amount

R = Rate Of Interest

T = Tenure

Example

Imagine you invested Rs. 10,000 at 6% p.a. for 5 years, then the interest is

I = (10,000 x 6 x 5)/100

The interest earned for 5 years is Rs. 3,000

Compound Interest Calculation

Compound Interest (CI): To calculate compound interest, you can use the following formula.

A = P (1 + (r/n)) ^ nt

Where,

A = The final amount the investor receives

P = Principal amount invested initially

r = interest rate

n = number of times interest is applied per year

t = time passed (in years)

Example

X has loaned Rs. 1000 at an interest rate of 10% for 2 years to Y.

Then the final amount X receives from Y is

A = 1000(1 + (10/1))^1*2

A = 1000(11)^2

A = 1210

Hence, X receives Rs. 1210 at the end of two years.

To find the compound interest, subtract the principal amount from the final amount. Then the interest earned is Rs. 210.

In case Simple interest was used in the same scenario, the interest earned would be

I = (1000 x 2 x 10)/100

I = 200

When compounding is done, the investor earns more as time increases.

How To Calculate Fixed Deposit Interest

Banks employ compound interest to calculate the fixed deposit interest. Depending on the amount invested, the tenure of the investment, and the type of FD, the interest rate changes.

To know the interest rate and interest you will earn on the amount, approach the bank or check for details before investing. Additionally, you can use an FD calculator to determine the interest.

How To Calculate FD Interest Using A FD Calculator?

FD calculator is simple to use. You can set the contributing factors such as the amount, interest rate, and tenure on the calculator, and the device will immediately display the FD maturity amount in seconds.

Given that figuring out an FD's maturity amount can be difficult and time-consuming, an online FD calculator makes it easy to find out.

You can compare the interest rates and maturity amounts of FDs provided by various financial institutions by using an FD calculator. With all the information at your disposal, you can make an educated choice.

Conclusion

When you invest in an FD, you must understand how much profit you will make at the end of the tenure. However, depending on the type of FD you have chosen, and the tenure, the interest rate changes. So does the interest you earn. Use an FD calculator to be aware of how much interest you will be earning. Additionally, it is important to educate yourself on how to calculate fixed deposit interest.

How To Calculate FD Interest Related FAQs

Banks use compounding to calculate interest for fixed deposits. Compounding allows investors to earn more profits.

Different types of FDs calculate gains and payout at different intervals - annually, half-yearly, quarterly, and monthly. Depending on the type of FD you have invested, your interest will be calculated.

The FD Calculators are free to use. You do not need to pay anything to use these calculators. You can use them as many times as required.

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