Explanation:
Interest is a fee paid by a borrower of assets to the owner as a form of
compensation for the use of the assets. It is most commonly the price paid for
the use of borrowed money,^{ }or, money earned by deposited funds. When money is borrowed,
interest is typically paid to the lender as a percentage of the principal, the amount owed. The
percentage of the principal that is paid as a fee over a certain period of time
(typically one month or year), is called the interest rate.
Simple interest
Simple interest is calculated only on the
principal amount, or on that portion of the principal amount that remains
unpaid.
The amount of simple interest is
calculated according to the following formula:
where r is the period
interest rate (I/m), B_{0} the initial balance
and m the number of time periods elapsed.
To calculate the period interest rate r,
one divides the interest rate I by the number of periods m.
For example, imagine that a credit card holder
has an outstanding balance of \($\)2500 and that the simple interest rate is 12.99%
per annum. The interest added at the end of 3 months would be,
and he would have to pay \($\)2581.19 to pay
off the balance at this point.
If instead he makes interest-only payments
for each of those 3 months at the period rate r, the amount of
interest paid would be,
His balance at the end of 3 months would
still be \($\)2500.
http://en.wikipedia.org/wiki/Interest
Compound interest arises when interest is added to the principal, so that from that
moment on, the interest that has been added also itself earns interest. This addition
of interest to the principal is called compounding. A bank account, for example, may
have its interest compounded every year: in this case, an account with \($\)1000
initial principal and 20% interest per year would have a balance of \($\)1200 at
the end of the first year, \($\)1440 at the end of the second year, and so on.
Compound
A formula for calculating compound interest is A = P *((1+r/n)
to the power n*t)
Where,
1.
A = final amount
2.
P = principal amount (initial investment)
3.
r = annual nominal interest rate (as a decimal)
(it should not be in percentage)
4.
n = number of times the interest is compounded per year
5.
t = number of years
Example usage: An amount of \($\)1500.00 is deposited in a bank paying an annual
interest rate of 4.3%, compounded quarterly. Find the balance after 6 years.
A. Using the formula above, with P = 1500, r = 4.3/100 = 0.043, n
= 4, and t = 6:
So, the balance after 6 years is approximately \($\)1,938.84.
http://en.wikipedia.org/wiki/Compound_interest
The above explanation is copied from
Wikipedia, the free encyclopedia and is remixed as allowed under the Creative
Commons Attribution- ShareAlike 3.0 Unported License.