Interest Income Calculator

What is Interest Income?

Interest income is the amount of money earned from investments or savings accounts that pay interest. It's a form of passive income that grows over time due to compound interest, where you earn interest not only on your initial principal but also on the accumulated interest from previous periods.

The Compound Interest Formula

The formula for calculating compound interest is:

\[A = P(1 + \frac{r}{n})^{nt}\]

Where:

• \(A\) = Final amount
• \(P\) = Principal amount (initial investment)
• \(r\) = Annual interest rate (in decimal form)
• \(n\) = Number of times interest is compounded per year
• \(t\) = Number of years

Calculation Steps

1. Determine the principal amount (P), annual interest rate (r), compounding frequency (n), and time period (t).
2. Convert the annual interest rate to decimal form (divide by 100).
3. Plug these values into the compound interest formula.
4. Calculate the final amount (A).
5. Subtract the principal from the final amount to get the interest income.

Example Calculation

Let's calculate the interest income for a principal of $10,000, an annual interest rate of 5%, compounded monthly, over 2 years:

1. \(P = \$10,000\), \(r = 5\% = 0.05\), \(n = 12\) (monthly compounding), \(t = 2\) years
2. \(A = 10000(1 + \frac{0.05}{12})^{12 \times 2} = \$11,051.68\)
3. Interest income = \$11,051.68 - \$10,000 = \$1,051.68

Visual Representation

The green portion represents the principal ($10,000), and the blue portion represents the interest income earned ($1,051.68).