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Interest in Maths

Posted by Ravi Kumar at Friday, January 2, 2009
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Interest in Maths
Interest is the cost of borrowing money. An interest rate is the cost stated as a percent of the amount borrowed per period of time, usually one year.

Simple Interest:
Simple interest is calculated on the original principal only. Accumulated interest from prior periods is not used in calculations for the following periods. Simple interest is normally used for a single period of less than a year, such as 30 or 60 days.

Simple Interest = p * i * n

Example: You borrow $10,000 for 3 years at 5% simple annual interest.
interest = p * i * n = 10,000 * .05 * 3 = 1,500

Compound Interest:
Compound interest is calculated each period on the original principal and all interest accumulated during past periods. Although the interest may be stated as a yearly rate, the compounding periods can be yearly, semiannually, quarterly, or even continuously.You can think of compound interest as a series of back-to-back simple interest contracts. The interest earned in each period is added to the principal of the previous period to become the principal for the next period.

For simple interest problems click here

For compound interest problems click here

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