How to Calculate FD Maturity Value
You can invest your large amount of capital in a fixed deposit for a specific duration at a fixed interest rate. When the investment matures, you will get your original investment plus any interest earned. An FD is popular because it provides guaranteed interest income as well as the highest level of security.
An FD calculator is a tool that can be used to calculate the maturity amount and interest rates of your FD. You can determine both by using two different formulas: Simple Interest and Compound Interest.
Let’s look at both the Simple and Compound Interest Formulas for a better understanding of how an FD calculator is used.
Simple Interest Formula for Calculating FD Interest
Fixed deposit interest is calculated using the following formula:
(P x R x T/100) = Principal Amount x Annual Interest Rate x Time Period / 100
Here is an example of how to compute FD interest using a simple interest formula.
Assume you have an Rs.10,000 investment with an annual return of 8% over 5 years. Using a basic interest formula, the interest on your fixed deposit will be calculated as follows.
Step 1: 10,000 x 8 x 5 = 4,00,000
Step 2: 4,00,000/100 = 4,000
So, for five years, you will receive Rs.4,000 in interest.
As a result, if you invest Rs.10,000 in a fixed deposit with an annual interest rate of 8%, you will receive Rs.14,000 as a maturity amount after 5 years, plus a 4% interest income.
Compound Interest Formula for Calculating FD Interest
Fixed deposit interest is calculated using the following formula:
Compound Interest (CI) = P ((1 + i/100)n – 1
In this way of computing interest income, you accrue interest not only on the primary but also on the premium amount. Many bank FDs provide compound interest rates, assuring that you get a reasonable interest rate on your fixed deposits.
Here is an example to know how the compound interest formula is used to calculate a fixed deposit.
To further comprehend this, the amount of Rs.10,000 invested at 8% each year is taken as an example.
For the first year, the simple Interest Technique formula is being used to compute interest income.
Formula: 10,000x8x1/100 = 800
The first year’s interest will be Rs.800. This sum will be added back to the principal in compound interest calculations, and the principal for the second year will be Rs.10,800.
In the second year, on a total of Rs.10,800, you will earn an interest rate of 8%.
Formula: 10,800x8x1/100 = 864
Your interest income has risen to Rs.864 now. This will be added to the principal amount, bringing the total to Rs.11,644. Using the same procedure, you can calculate compound interest for the next three years. Some banks, on the other hand, give compound interest on a monthly, quarterly, or half-yearly basis.
Rather than calculating it year by year, you may use a simple formula (Compound Interest (CI) = P(1 + i/100)n – 1) that multiplies the principal amount by the interest rate multiplied by the number of periods in years.
In the formula, P is the principal amount, n is the number of years, and I is the annual interest rate.
As a result, CI= 10,000 (1+8/100)5 – 1 = 4,693
Hence, your total maturity amount is Rs.14,693.
Concluding Comments
Investing in an FD, like any other financial decision, requires establishing one’s budget and making it work in tandem with one’s financial goals. However, we need to promote financial literacy to everyone so that one can make an informed decision to invest in safe and growing assets.
The goal of a fixed deposit is to reduce risk while providing guaranteed earnings. You can use an FD calculator to calculate your maturity amount. This calculator can also be used to compare the many types of fixed deposit programs offered by banks and other financial institutions. It helps in identifying which scheme delivers the best returns throughout the specified period.
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