In general we can say that Interest is the money we pay for borrowing money from someone else. Here we will discuss what is interest? We will first study about "simple interest”, to understand this we we'll take an example.
Suppose there are two persons X and Y. X lends money to Y, in this case 'Y' is borrower. So 'Y' pays a fee to 'X' and this fee is called as interest. This is also called Simple Interest or flat rate.
Simple interest or flat rate interest can be calculated by formula shown below:
Formula of simple interest is = Principal × Rate × Time. Where, principal is the amount lent or borrowed, 'rate' is the Percentage of principle charged as interest each year and 'time' is the time in years of loan.
We can write this formula as
I = P R T,
Where 'I' refers to interest, 'p' refers to principle, 'r' refers to interest rate and
't' refers to time.
Using this formula we can find p, r, t.
p = i/rt,
t = i/pr,
r = i/pt,
Whenever money is borrowed then total amount is equals to principle amount plus interest so we can say that
* total repayments = (principal + interest).
Usually amount is paid back in regular installments either monthly or weekly
* monthly payment amount = principle + interest/ loan Period (T) in months.
* weekly payment amount = principle + interest/loan period (T) in weeks.
When time 'T' is given in years.
In this case we convert time 'T' from years to months, to do this we will multiply 'T' by 12, because there are 12 months in a year.
For example: Suppose 'x' purchases a computer on loan. Computer cost is $ 1500, 'r' is 12 % if loan is paid back in weekly installments over 2 years. Then Simple Interest can be calculated as:
Interest (I) = PRT,
=1500 * 12 * 2 / 100
Compound Interest depends on principal amount and past interest. Compound interest is basically used to get interest over the interest to earn some profit. Here compound word stands for compounding interest and principal.
Compound interest definition: Compound interest is interest that is paid on principal as well on interest on any time of Period. This compound inter...Read More