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. A bank deposit will gain
interest because the bank is paying for the use of the deposited funds.
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), B0 the initial balance
and m the number of time
periods elapsed. (Our solved example in mathguru.com uses this concept)
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
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