# Interest

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

Interest

### Simple 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

### Simple Interest

PE10      Simple_Interest