Home
Back
Cost of Money Formula:
| From: | To: |
The Cost of Money represents the time value of money - the financial cost associated with borrowing or lending funds over a specific period. It quantifies the interest expense or opportunity cost of using money over time.
The calculator uses the simple interest formula:
Where:
Explanation: This formula calculates the simple interest cost, which represents the basic cost of using money over time without compounding effects.
Details: Understanding the cost of money is essential for financial planning, investment decisions, loan comparisons, and evaluating the time value of financial transactions.
Tips: Enter the interest rate as a percentage (e.g., 5 for 5%), principal amount in your local currency, and time period in years. All values must be positive numbers.
Q1: What is the difference between simple and compound interest?
A: Simple interest is calculated only on the principal amount, while compound interest includes interest on previously earned interest, resulting in exponential growth.
Q2: When is simple interest typically used?
A: Simple interest is commonly used for short-term loans, some bonds, and in educational examples to demonstrate basic interest concepts.
Q3: How does time affect the cost of money?
A: The longer the time period, the higher the cost of money, as there's more time for interest to accumulate on the principal amount.
Q4: What factors influence interest rates?
A: Interest rates are influenced by central bank policies, inflation, economic conditions, credit risk, and market demand for funds.
Q5: Can this calculator be used for investment returns?
A: Yes, the same formula can calculate investment returns when considering simple interest scenarios, though most investments use compound interest.