Simple and Compound Interest

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What is Simple Interest?

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Simple Interest is the interest calculated only on the principal amount, or on that portion of the principal amount which remains unpaid. It is calculated using the formula: I = P * r * t, where I is the interest, P is the principal, r is the rate of interest per year, and t is the time in years.

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What is Compound Interest?

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Compound Interest is the interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods. It is calculated using the formula: A = P(1 + r/n)^(nt), where A is the amount of money accumulated after n years, including interest, P is the principal amount, r is the annual interest rate, n is the number of times that interest is compounded per year, and t is the number of years.

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What is the formula for calculating Simple Interest?

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The formula for calculating Simple Interest is I = P * r * t.

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What is the formula for calculating Compound Interest?

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The formula for calculating Compound Interest is A = P(1 + r/n)^(nt).

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If you invest $1,000 at a simple interest rate of 5% for 3 years, how much interest will you earn?

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You will earn $150 in interest. (I = 1000 * 0.05 * 3 = $150)

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If you invest $1,000 at a compound interest rate of 5% compounded annually for 3 years, how much will you have at the end?

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You will have $1,157.63 at the end. (A = 1000(1 + 0.05/1)^(1*3) = $1,157.63)

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What is the principal in a loan?

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The principal is the original sum of money borrowed in a loan or invested, excluding any interest or fees.

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What does the term 'interest rate' mean?

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The interest rate is the percentage of the principal that is charged as interest for a loan or paid on an investment over a specific period.

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How do you calculate the total amount to be paid back on a loan with simple interest?

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Total Amount = Principal + Interest, where Interest = P * r * t.

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How do you calculate the total amount to be paid back on a loan with compound interest?

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Total Amount = Principal * (1 + r/n)^(nt).