I came across a formula for interest calculation.trying to find out what it is..Interest= P * n(n + 1)* r^2?

Answer 1

It isn't a formula for interest calculations unless it is for a very narrow and specific case. I am an economist and I have never seen this and I wonder if you have copied it correctly.

It strikes me as near a "sum of the digits," estimation method, but it would be divided by 2 if it were and r would not be squared. My suspicion is that this is a miscopying of the "rule of 78's," method of estimating interest OR in the case of an actual contract, the contractually binding rebate mechanism.

If it is a rule of 78's computation, you take the true total compounded interest under the ordinary method of calculating interest and set it equal to r. r is the total interest that could be due if the loan is repaid as contractually written.

In this scheme, n is the number of original periods in the contract. The distortion becomes large after 36 months or in high interest rates so they are generally illegal in either circumstance.

p would be number of periods remaining.

The formula for current period interest earned would then be

2*r*P/n/(n+1).

To give an example, imagine you had a twelve month loan of $1200 and the interest would be $78 over the life of the loan.

The first period interest is 2*78*12/12/13 or $12.

The idea is that the sum of the digits of the periods are nearly a Taylor expansion of the true amount In a one year loan there are 12 periods, the sum of twelve periods is 1+2+3+...+11+12=78. Hence, the rule is called the rule of 78's.

For short multi-payment loans of reasonable interest rates, it is actually a close approximation of true interest.

Answer 2

I think you're asking what the terminology is for each variable?

P = Price
n = number of periods
r = rate

Hope this helps, but to be honest I majored in Finance and I never saw this formula...

Answer 3

compound amount.
u go to uoft?