REMUNERATIVE RATE OF INTEREST AND ACCUMULATIVE RATE OF INTEREST
The remunerative rate of interest is the rate at which interest is calculated on a principal amount over a period of time. It is also known as the nominal rate or the stated rate. For example, if a bank offers a fixed deposit with a remunerative rate of 5% per annum, it means that the interest earned will be 5% of the principal amount for every year that the deposit is held.
The accumulative rate of interest is the rate at which interest is compounded on the principal amount over a period of time. It takes into account the effect of compounding, where the interest earned in each period is added to the principal amount, and then interest is calculated on the new balance. The accumulative rate of interest is also known as the effective rate or the annual percentage yield (APY).
When it comes to investing money, it’s important to understand the different types of interest rates that can affect your returns. The two main types of interest rates are the remunerative rate of interest and the accumulative rate of interest. While they may sound similar, they are quite different in their calculation and impact on investments.
The remunerative rate of interest is the rate at which interest is calculated on a principal amount over a period of time. This rate is also commonly referred to as the nominal rate or the stated rate. It is the rate that is typically advertised by banks, financial institutions, and other investment providers. For example, if a bank offers a fixed deposit with a remunerative rate of 5% per annum, it means that the interest earned will be 5% of the principal amount for every year that the deposit is held.
The accumulative rate of interest, on the other hand, is the rate at which interest is compounded on the principal amount over a period of time. It takes into account the effect of compounding, where the interest earned in each period is added to the principal amount, and then interest is calculated on the new balance. The accumulative rate of interest is also known as the effective rate or the annual percentage yield (APY).
To better understand the difference between the two types of interest rates, let’s take a look at an example. Suppose you invest $1,000 in a fixed deposit with a remunerative rate of 5% per annum for five years. At the end of the five years, you will have earned $250 in interest, which is calculated as follows:
$1,000 x 5% x 5 years = $250
However, if the interest is compounded annually, the accumulative rate of interest will be higher than 5%, as the interest earned in each year is added to the principal amount, and interest is calculated on the new balance.
Using the same example, if the interest is compounded annually, the accumulative rate of interest will be approximately 5.12%. The calculation is as follows:
Accumulative rate of interest = (1 + (remunerative rate / n))^n – 1
Where: n = number of times the interest is compounded in a year (in this case, once a year)
Accumulative rate of interest = (1 + (5% / 1))^1 – 1 = 5.12%
At the end of the five years, the investment would have grown to approximately $1,281, which includes the interest earned and the principal amount.
It’s important to note that the accumulative rate of interest is not always higher than the remunerative rate of interest. In fact, the accumulative rate of interest can be lower than the remunerative rate of interest if the interest is compounded less frequently.
In conclusion, both the remunerative rate of interest and the accumulative rate of interest are important factors to consider when investing money. The remunerative rate of interest is the advertised rate that determines how much interest you will earn on your investment, while the accumulative rate of interest takes into account the effect of compounding and gives a more accurate representation of the return on your investment over time. Understanding the difference between the two rates can help you make more informed investment decisions and maximize your returns.
