Effect Of Change In Interest Rate Over A Period Of Time
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Sachin is in possession of extra cash and he is planning to invest it. He enquired about the fixed deposit rates at various banks. He came to know that different banks offer different interest rates. He just wondered what effect a 1% difference in interest rate can have on his investment.
Sachin started by taking an example of investment of Rs. 100000. He took the various interest rates and he came up with the following table for the value of the investment in different years:
FD return Chart- Rs 100000 invested Rates\Time 1 year 2 years 3 years 5 years 7 years 10 years 40 years 4% 104000 108160 112486 121665 131593 148024 480102 5% 105000 110250 115763 127628 140710 162889 703999 6% 106000 112360 119102 133823 150363 179085 1028572 7% 107000 114490 122504 140255 160578 196715 1497446 8% 108000 116640 125971 146933 171382 215893 2172452 9% 109000 118810 129503 153862 182804 236736 3140942 10% 110000 121000 133100 161051 194872 259374 4525926 11% 111000 123210 136763 168506 207616 283942 6500087 12% 112000 125440 140493 176234 221068 310585 9305097 13% 113000 127690 144290 184244 235261 339457 13278155 14% 114000 129960 148154 192541 250227 370722 18888351 15% 115000 132250 152088 201136 266002 404556 26786355 
The result really astonished Sachin as he found that a difference of 1% can make a huge difference in the long run (looking at the exponential curve!!!). For example, an investment of Rs. 1 Lakh for 40 years at an interest rate of 10% amounts to Rs. 4525925 whereas same investment for 40 years at an interest rate of 11% amounts to Rs. 6500086, a difference of Rs. 1974161. He also notices as the interest rate increases, this difference becomes bigger. For example, an investment of Rs. 1 Lakh for 40 years at an interest rate of 14% amounts to Rs. 18888351 whereas same investment for 40 years at an interest rate of 15% amounts to Rs. 26786354, a difference of Rs. 7898003! So, if you have to make a choice between 14% and 15% interest rate,
So, the conclusion is
- A small increase in interest rate makes a huge difference in the value of investment in the long run.
- The difference in the value of the investment for per unit increase in the interest rate increases with the increase in the base interest rate.
Published on May 14, 2010 · Filed under: Fixed Deposit Articles; Tagged as: interest rates, Investment, value of money
One Response to “Effect Of Change In Interest Rate Over A Period Of Time”
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George said on July 7th, 2010 at 12:01 pm
Very interesting analysis, a must read.
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