Imagine how lovely it would be if ice cream could keep multiplying in the same way that you can keep a bowl of ice cream in the fridge and wake up the next morning to find an extra bowl of ice cream. Wouldn’t it be a wonderful treat to eat what you enjoy? In this article, we are going to discuss simple interest formula as well as compound interest formulas.
Compound interest is a treat for people who work tirelessly day and night to earn money in order to realize their dreams and ambitions. Compound interest is similar to multiplying the amount of money in your bank account. In fact, earning compound interest is advantageous because it is more than just simple interest on a specific amount of money.
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What is Compound Interest?
Interest formulas primarily refer to simple and compound interest formulas. Simple interest (SI) is a type of interest that is applied to the amount borrowed or invested for the entire term of the loan, without taking into account any other factors such as past interest (paid or charged) or other financial considerations. Simple interest is typically applied to short-term loans of one year or less that are managed by financial institutions. The same holds true for money invested for a similarly brief period of time. A simple interest rate is a ratio that is usually expressed as a percentage.
Compound interest, on the other hand, is the interest calculated on the principal and interest accumulated over the previous tenure. As a result, compound interest (CI) is also known as “interest on interest.” It is crucial in determining the amount of interest on a loan or investment. The formulas for compound and simple interest are provided below.
Difference Between Simple & Compound Interest
- The cost of borrowing money is referred to as interest, and the borrower pays a fee to the lender in exchange for the loan.
- In most cases, simple interest paid or received over a specific time period is a fixed percentage of the principal amount borrowed or lent.
- Borrowers must pay interest on interest as well as principal because compound interest accrues and is added to the accumulated interest from previous periods.
Simple Interest Formula
Formula for simple interest (SI) = P*R*T/100
Formula for calculating the amount (A) = P+SI
Compound Interest Formula
Compound interest accumulates and is added to previous periods’ accumulated interest; it is, in other words, interest on interest. Compound interest is calculated as follows:
P*- P
P=Principal amount
Annual interest rate = r
t=The number of years for which interest is charged.
It is calculated by multiplying the principal amount by one, adding the annual interest rate multiplied by the number of compound periods, and then subtracting the principal reduction for that year. Borrowers must pay interest on the interest as well as the principal when using compound interest.
Simple & Compound Interest Terminology
- Principal (P)- The amount of money lent for a set period of time at a fixed interest rate.
- Time (T) – The length of time for which the principal is lent, usually expressed in years.
- Interest is the profit made from lending a principal for a set period of time.
- Rate (R) – It is the percentage of interest earned on a loan.
- Amount- The total amount of money left at the end. It is the total compound interest or simple interest earned plus the original principal.
Examples
Question 1) When simple interest is applied to a sum of Rs. 25000, it becomes Rs. 30000 at the end of four years. Determine the interest rate.
Solution) Given, Principal = P equals Rs. 25000
Time = T = 4 years Amount = Rs. 30000 at the end of a time periods of 4 years
SI = Rs. 30000 minus Rs. 25000 equals Rs. 5000.
SI = P*T*R / 100
R = S*I 100 / P*T
R = 5000 100 /(25000 4) R = 5 percent
As a result, the interest rate is 5%.