Interest is a word often used in the world of finance. Whether in investments, debt or lines of credit. But after all, how to calculate interest rate and perform this calculation in financial applications ?

That’s what you’ll learn in this article. Good reading!

What is the correct way to calculate interest rates?

Knowing how to calculate interest rates is very important to follow the evolution of your investment and see if your financial goals are on track.

In fixed income applications , profitability is always linked to a percentage. The remuneration calculation can be:

– prefixed: pre-established interest rate;

– fixed rate: rate linked to an economic indicator, such as Selic or CDI;

– hybrid: combination of both.

So, to know how to calculate interest rates, you need to understand how simple interest and compound interest work. Come on?

How to calculate interest rates: simple interest

In this type of calculation, just take the entire amount applied and multiply it by the percentage. In the case of prefixed fixed income, the result will be exact. In post-fixed, the calculation cannot be done in advance, as the economic index changes over time.

Here’s how to calculate simple interest rates:

Example

Let’s say you invested R$10,000 in a prefixed fixed income investment with a return of 5% per year and left the money invested for two years.

To find out what the return will be, the calculation is 10000 x 0.05=500.

This means that this investment earned R$500 in one year, that is, R$1,000 in two years.

How to calculate interest rates: compound interest

Also known as interest on interest. The calculation is not made on the initial value, it is made on the value of the previous period.

So, see how to calculate compound interest rate s.

First, this calculation is made taking into account four factors: invested amount, final value, profitability and investment time.

The formula is as follows: M = C x (1 + i)t.

M is the final amount, C represents the amount invested at the beginning, i is the interest rate and t is the investment time.

With at least three of these factors it is possible to calculate and discover the fourth factor.

Example

As we mentioned in the previous example, suppose you invested 10,000 in a fixed income investment with a return of 5% per year and left the money invested for two years.

In the first year the calculation is 10000 x 0.05=500. In the second year, the calculation will be made on the value of the previous period, that is: 525
The final value will be R$11025, with an income of R$1025.

Advantages of compound interest

Time is compound interest’s best friend. Some fixed-income financial investments that use interest on interest to remunerate investors bring a very interesting return, especially when focusing on the long term.

As you saw in the examples, with an annual return, the investment with compound interest yielded R$25 more. Now imagine the effect of compound interest on a monthly return for ten years.

The higher the interest rate on the investment, the higher the final return. This is because it is the rate value that determines how fast the investment will grow.

Now that you know how to calculate interest rates, check out some interesting investments that accrue interest on interest.

Treasury Direct

Direct Treasury is a National Treasury program that enables the purchase and sale of federal securities for individuals. Those who buy these securities are lending their money to the federal government, which subsequently returns the invested amount with interest (the return on the investment).

The government uses the money from the purchase of bonds to finance operations to improve the country in sectors such as infrastructure and health.

The return on Treasury Direct securities, as mentioned above, can be pre-fixed, post-fixed or hybrid. In the last two cases, the rate depends on some economic index and two examples are the Selic and the IPCA.

Some Treasury Direct securities require the payment of semi-annual coupons, such as the IPCA+ Treasury with Semiannual Interest and the Prefixed Treasury with Semiannual Interest.

In both securities, the investor receives payment of accrued interest every six months according to the fixed rate of the security.

CBD

Bank Deposit Certificates (CDB) work very similarly to the Direct Treasury, the difference here is that the investor lends the money to a bank.

The bank, in turn, will use this loan to finance activities and generate more cash.

CDBs also have post-fixed securities, which generally accompany the CDI; prefixed, which have a fixed rate of return and hybrids; which are the combination of a fixed rate plus an economic indicator, such as the IPCA.

In the same way as in Fazenda Direto, there are also some CDBs that pay coupons to investors. This interest is paid periodically (monthly, half-yearly, annually, depending on the rules of each investment).

LCI

Acronym used for Real Estate Letter of Credit , this investment also works similarly to the two previous applications. In this case, the investor lends money for activities in the real estate market.

When the investor receives the money back, he will have the addition of interest established at the time of purchase of the bonds.

This investment is exempt from income tax.

Investment Funds

Funds are a financial application where several investors come together to make an investment. Those who maintain these funds are financial specialists, called managers.

They pool all investors’ money and apply it to different investments, considering the strategy that the fund follows. There are fixed income funds, stock funds, hedge funds, exchange funds and several others.

private pension

The purpose of private pension is to collect money in the long term and build equity. It is possible to make monthly or periodic contributions. Investors’ money is invested in a pension fund and begins to yield with the effect of compound interest.

As in investment funds, several people invest money in the fund and a manager follows a pre-established strategy. She can be aggressive, moderate or conservative, what varies is the risk.

Pensions have a number of tax advantages and are a great way to invest in your future. Over the years, the effect of compound interest is exponential!

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