Money Market Interest Calculator

What is Money Market Interest?

Money market interest refers to the earnings generated from investments in money market accounts or funds. These are low-risk, short-term investments that typically offer higher interest rates than traditional savings accounts. Money market accounts often require higher minimum balances and may have restrictions on withdrawals, but they provide a safe way to earn interest on your savings.

The Money Market Interest Formula

The formula for calculating money market 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 (usually 12 for monthly compounding)
• \(t\) = Number of years

Step-by-Step Money Market Interest Calculation

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. Divide the annual rate by the compounding frequency to get the periodic rate.
4. Multiply the time period by the compounding frequency to get the total number of compounding periods.
5. Apply these values to the money market interest formula.
6. Calculate the final amount (A).
7. Subtract the principal from the final amount to get the interest earned.

Example Calculation

Let's calculate the money market interest for a principal of $10,000, an annual interest rate of 2.5%, compounded monthly, over 1 year:

1. \(P = \$10,000\), \(r = 2.5\% = 0.025\), \(n = 12\), \(t = 1\) year
2. \(A = 10000(1 + \frac{0.025}{12})^{12 \times 1}\)
3. \(A = 10000(1 + 0.002083)^{12} = \$10,252.88\)
4. Interest earned = \$10,252.88 - \$10,000 = \$252.88

Visual Representation

The green portion represents the principal ($10,000), and the blue portion represents the money market interest earned ($252.88) over one year.