Financial Terms / interest

# Understanding Interest Rates

Interest is like a tax for borrowing money - it's a percentage of the amount borrowed.

## Formula

``(gross figure) x (1 + interest rate per period)``

## How do I calculate the interest?

`If you need to calculate compound interest, the best way to do it is to use either  Sourcetable. The general compound interest formula is `FV=PV(1+r)n`, where FV is the Future Value, PV is the Present Value, r is the rate of interest, and n is the number of compounding periods. To calculate compound interest in Sourcetable, you can use the formula `(gross figure) x (1 + interest rate per period).``

## What is CMT yield?

`CMT yield stands for "Constant Maturity Treasury" yield and is the yield read from the Treasury's daily par yield curve.`

## Where are CMT rates read from?

`CMT rates are read from fixed, constant maturity points on the yield curve.`

## How are ARM rates set?

`ARM rates are set using CMT rates. The formula used is `ARM rate = CMT rate + margin`.`

## Key Points

How do I calculate interest?
`(gross figure) x (1 + interest rate per period)`
Interest is Earned by Lenders
Interest is a way for lenders to make money by lending out their funds. Lenders are paid a rate of interest for allowing the use of their funds. This rate of interest is determined by the borrower's credit worthiness, the amount of money borrowed, and the length of the loan.
Interest is Paid by Borrowers
Borrowers pay a rate of interest for using the funds of lenders. This rate of interest is determined by the borrower's credit worthiness, the amount of money borrowed, and the length of the loan. The rate of interest is usually higher for borrowers with lower credit scores because the lender is taking on a greater risk by lending to them.