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Daily Compound Interest (Formula) | Step by Step Calculation with Examples - YouTube
Channel: WallStreetMojo
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Hello everyone hi and welcome to the
channel of wallstreetmojo. To know more
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about this video daily compound interest
watch the video till the end and also if
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that's given below. Welcome everyone and today's topic is daily compounding
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interest which is basically a part of
the financial modelling topic and when
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you do financial modelling Excel is
something that comes into picture that's
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the first thing
because without Excel financial modeling
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is not possible right so this is a part
of the excel modelling that you do and
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let's understand this formula in a very
detail format what we are going to learn
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is we are going to learn the what
exactly the daily compound interest is then
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we will understand with the help of few
examples how things will go about in
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this particular formula once we are
done with this examples I'll
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explain you some of the relevance and
the use of this formula so let's get
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started
as you can see over here the daily
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compound interest formula it shows that E = (P(1+ R / n) ^ nt) - p
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well looks
difficult but let's understand this by
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understanding each and every variable
here first of all we need to understand
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what exactly daily compound interest is
all about well what is daily compound
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interest this is the first and the
foremost thing let's learn this well the
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daily compound interest means interest
that is getting accumulated on daily
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basis on daily basis and it is
calculated by charging interest on the
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principal plus the interest okay that is
on a daily basis therefore it will be
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higher than the interest
which is earned on monthly or quarterly so
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let me give you a very detailed
compounding concept yearly, half yearly
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okay then you have quarterly and then
you have monthly and you have daily so
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the interest that you will earn let's
say over here you're earning five let's
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say we you're earning interest or the
compound interest is five it will be six here
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just a hypothetical way seven, eight and
nine so hypothetically the daily
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compounding interest is going to be
higher than the early compounding
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interest rate so this is gonna be the
entire flow how it will go about so
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always half year compounding
will be greater than yearly quarterly
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will be greater than half yearly, monthly
will be greater than quarterly and daily
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will be greater than monthly. I hope this
is very basic concept that you should
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learn about compounding right let's
understand the formula well the formula
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is A=(P(1+r/n)^(nt)) - P
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let's understand
this formula here A= daily compound
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rate, P = principal amount, R = rate
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of interest and n = time
period
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so here generally when someone deposits
one in the bank the bank pays the
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interest to the investor in the form of
quarterly interest but when someone
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lends money from the bank the bank
charges the interest from the person who
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has taken the loan in the form of daily
compounding interest so the scenario is
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most applicable in the case of credit
cards okay
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let's understand this with the help of
an example
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to get a proper clarity on this topic
well let's say a sum
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of 4000 is borrowed from a
bank where the interest rate is let's
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say 8% and the amount borrowed
is for a period of let's say two years
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we have all the variables so let us find
out how much will be the daily
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compounding interest calculation by the
bank on the loan provided what is the
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principal this is a principal your
interest rate your n okay so this is two
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years and n is usually 365 days so your
time over here is two years right let's
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get the formula going
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your daily compounding interest is going
to be is equal to here your first open
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the bracket the principle amount here
that is four thousand one plus your
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interest rate eight percent okay divided
by open another bracket one hundred into
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your number of days that is 365 into 365
okay close another bracket once that is
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done raised to open another bracket your
365 days that is your n into your time
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that is two years right and n into t
remember don't forget the formula -
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principal amount here it is your daily
compounding interest is closely around
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692 693 it should be just let me still
see if there is any okay so it was
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basically the percentage so I had kept
it as 8% so that was it was showing 6.45
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when I change it to the number it shows
me 693.96 well this was the
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example part which I thought probably
may be useful to you so that you know we
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get to a proper conclusion that I know
how things are arrived let's take
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another example to let's say the daily
compounding interest is practically
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applicable for credit card spending
which is charged by the banks on the
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individual who uses credit cards now the
credit card generally have a cyclope closely
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around 60 days during which time the
banks does not charge any interest but
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the interest is charged when the
interest does not pay back within the 60
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days so if a sum of 4000 is used as a
credit card by an individual for its
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spending and the interest rate is 15%
per annum as the interest charge for the
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credit card is generally very high and
the amount is repaid by the individual
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after 120 days that is six days and
after the grace period is over so the
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individual needs to pay the bank
interest for 60 days and is charged at
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the daily compounding rate
okay so over here in this particular
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formula here instead of n is 365 the
time 0.2 time over here will be
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point two so it will change to 64.50
here and instead of
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58 I'll take 15 okay 15 as the annual
interest rate so it will be closely
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around 122 will be the daily interest
rate that was just to one single change
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that I wanted to make you understand
example number three let's say a sum of
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$35,000 is borrowed from a bank as a car
loan where the interest rate is let's
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say seven percent per annum and the
amount is borrowed and let's say it is
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borrowed for five years of times spent
so let us find
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out how much will be the daily
compounding interest rate calculation by
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the bank on the loan provided so
principal is thirty five seven and make
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sure n is your 365 so of a formula as
simple as that
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you should be now you know clear about
you know how the formula will go so
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rather than you know talking about the
entire formula I'll just to input all
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the details so thirty five thousand come
on so $35,000 one plus point seven
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divided by 365 raised to 365 into five -
$35,000 right so in a way close here on
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1120 this is a very big amount still
let me figure out if any mistake has
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been conducted here okay it was seven
percent so I took the zero point seven
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this was a simple mistake zero point
zero seven
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so fourteen six sixty five so now
finally let's understand the relevance
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and the use of this formula see
generally when someone deposits money in
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the bank the bank pays the interest to
the investor in the form of quarterly
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but when someone lends some money from the bank the bank charges the interest
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from the person was taken the loan in
the form of the daily compounding
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interest so the higher the frequency
more the interest is charged right so
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our order is paid on the principle so
this is how the bank makes their money
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on the differential of the interest. I
hope you have got a fantastic idea about
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this particular topic if you have
learned and enjoyed watching this video
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