When you see a rate of interest quoted you may safely conclude that it is for a year—per annum (by the year), is the correct phrase—unless something is said to the contrary.
The rate paid in the shape of interest depends on a number of things, but the main question is, will the principal be perfectly safe? If the answer be yes, then the interest in these days will certainly be low. But on this subject we shall have more to say in a succeeding article.
To calculate interest on any sum for a year, the rule is to multiply by the rate per cent. and divide by 100. For example, find the interest on £460 at 4½ per cent. Here you multiply 460 by 4½, which gives 2,070, and dividing by 100, arrive at the answer, £20 14s.
When the interest is wanted for a certain number of days, you must multiply by the number of days and by double the rate per cent., and divide by 73,000. By way of example, find the interest on £320 for 30 days at 3 per cent. Multiply 320, first by 30 and afterwards by 6, which gives 57,600. Now divide by 73,000, and you have the total amount of interest, 15s. 9d.
People who have much calculating of interest to do should invest in a book of Commercial Tables. The use of these saves a great deal of trouble. There are some short cuts, however, which every business woman should carry in her head. At 5 per cent. per annum the interest upon a pound for every month is one penny. Having seen what this comes to, other rates may be reckoned by adding to or deducting from the 5 per cent. product.
For example, 2½ per cent. is one-half; 3 per cent. is six-tenths; 3½ per cent. is seven-tenths; 4 per cent. is four-fifths; 6 per cent. is six-fifths; 7½ per cent. is one-half more. Thus, 5 per cent. on £30 for ten months will be £1 5s.; 2½ per cent., 12s. 6d.; 3 per cent., 15s.; 3½ per cent., 17s. 6d.; 4 per cent., £1; 6 per cent., £1 10s.; and 7½ per cent., £1 17s. 6d.
Sometimes, on interest becoming due, it is regularly added to the principal, and interest is paid on the new principal thus formed. Money invested on this accumulating system is said to be placed at compound interest.
There is something startling about the growth of money invested in this way. “A penny,” says Dr. Price, “so improved from our Saviour’s birth as to double itself every fourteen years—or, what is nearly the same, put out at five per cent. compound interest at our Saviour’s birth—would by this time have increased to more money than could be contained in 150 millions of globes, each equal to the earth in magnitude, and all solid gold.
“A shilling put out at six per cent. compound interest would, in the same time, have increased to a greater sum in gold than the whole solar system could contain, supposing it a sphere equal in diameter to the diameter of Saturn’s orbit; and the earth is to such a sphere as half a square foot or a quarto page is to the whole surface of the earth.”
To show the difference between “simple interest,” in which the interest does not bear interest, and “compound interest,” in which it does, we give the following table, showing the time it takes for a sum to double itself at different rates:—