What is the Monthly Compound Interest?

Monthly Compound Interest Formula

The equation for calculating it is represented as follows,

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Where

  • A= Monthly compound rateP= Principal amountR= Rate of interestN= Time period

Generally, when someone deposits money in the bank, the bank pays interest to the investor in the form of quarterly interest. But when someone lends money from the banks, the banks charge the interest from the person who has taken the loan in the form of monthly compounding interest. The higher the frequency, the more interest is charged or paid on the principal. For example, the interest amount for monthly compounding will be higher than the amount for quarterly compoundingQuarterly CompoundingThe compounding quarterly formula depicts the total interest an investor can earn on investment or financial product if the interest is payable quarterly and reinvested in the scheme. It considers the principal amount, quarterly compounded rate of interest and the number of periods for computation.read more. This is the business model of a bank in a broader way where they make money in the differential between the interest paid for the deposits and the interest received for the loan disbursed.

Examples

Example #1

A sum of $4000 is borrowed from the bank where the interest rate is 8%, and the amount is borrowed for a period of 2 years. Let us find out how much will be monthly compounded interest charged by the bank on loan provided.

Below is the given data for the calculation

The Interest can be calculated as,

= ($4000(1+.08/12)^(12*2))-$4000

Example #2

 A sum of $35000 is borrowed from the bank as a car loan where the interest rate is 7% per annum, and the amount is borrowed for a period of 5 years. Let us find out how much will be monthly compounded interest charged by the bank on loan provided.

= ($35000(1+.07/12)^(12*5))-$35000

= $14,616.88

Example #3

A sum of $1 00,000 is borrowed from the bank as a home loan where the interest rate is 5% per annum, and the amount is borrowed for a period of 15 years. Let us find out how much will be monthly compounded interest charged by the bank on loan provided.

= ($60000(1+.05/12)^(12*8))-$600000

= $29435

So the monthly interest will be $ 29,435.

Relevance and Uses

Generally, when someone deposits money in the bank, the bank pays interest to the investor in the form of quarterly interest. But when someone lends money from the banks, the banks charge the interest from the person who has taken the loan in the form of monthly compounding interest. The higher the frequency, the more interest is charged or paid on the principal. This is how the banks make their money on the differential of interest.

This has been a guide to Monthly Compound Interest Formula. Here we discuss how to calculate monthly compound interest using its formula along with examples and a downloadable excel template. You can learn more about excel modeling from the following articles –

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