Interest is the money paid for the use of borrow money. It is calculated as a percent of the principal.
For example, suppose that you deposit $100 in a bank account offering 10% interest, how will your money grow in one year?
Answer: The total amount would be $110, the original principal plus the interest (10% of 100 = $100(0.10) = $10).
There are two types of savings accounts:
- Simple interest accounts (the interest earned is paid to the depositor)
- Compound interest accounts (the interest earned is left on deposit to earn more interest
Simple interest is the most common type of interest on loans for a car.
This type of loan is usually used for short-term loans.
Simple interest is determined by multiplying the interest rate by the principal by the number of periods. I = p r t
Example: How much we will get by investing $100 for 2 years with a bank that pays 10% (simple interest rate) annual?
The total amount would be $120, the original principal ($100) plus the interest (100*0.10*2) = $20).
The future value is the present value plus the interest.
Future value = principal + interest = p + I
Compound Interest Formula
F = Future value
P = Present value (Principal)
r = annual interest rate
n = number of compounding periods
t = time (years)
Interest on Interest