Simple and Compound Interest

The amount charged on the principal amount and expressed as percentage is called interest rate. The interest rate can be charged annually, bi-annually, or in a way agreed on by the two parties entering a contract. The interest can be divided into two categories - simple interest and compound interest.

Simple Interest

Simple interest is the amount calculated on the original principal amount, or on an amount left unpaid from the principal amount. Simple interest holds great importance in our daily life, which is why it's one of the most important topics in mathematics. It is usually the basis of many money transactions, especially in depository areas, where interest rate defines the earnings.

What is Simple Interest?

When interest rates are calculated using simple interest, we only calculate the interest separately with the Principal amount, number of years and Rate of interest and it is added to the principal amount.

SI = $\frac{P*R*T}{100}$

Simple Interest Formula

Below you could see simple interest formula (Simple interest rate formula) or simple interest equation,

Simple Interest is defined as:

Simple interest (SI) = $\frac{P*R*T}{100}$

where,

P denotes the principal amount.

N denotes the number of year.

R denotes the rate of interest

Compound Interest

As the name implies, compound interest is basically an amount paid not only on the principal amount but also on whatever interest has been paid already. In other words, interest amount is also added to the original principal amount and earns interest on total investment.

Interest accumulated over one period is applied to the principal before calculating the interest for the next period. Typical intervals are quarterly (4 times a year), monthly, daily, and continuously. Our capital will earn interest – and the interest will also earn interest, which is known as compound interest. Compound interest's principal amount is investment + interest.

What is Compound Interest?

When interest rates are calculated using compound interest, they calculate interest for the whole mean period and it is added to principal, and the resulted amount now serves as the principal for the next period of time. During the next period, the interest is calculated on the new principal, which is then added to it again. We use equation for compound interest to calculate interest for the whole mean period.

Below you could see compound interest equation:

Compound interest = A - P

Where,

A = $P(1+\frac{R}{100}$)

Compound Interest Definition

By definition, compound interest is the investment rate that grows exponentially and not linearly as in the case of simple interest.

Compound Interest Formula

The formula for compound interest is given below:

Compound interest

$P(1+\frac{R}{100})^N$

Where,

P = Principal amount

N = Period of time

R = Rate of the interest

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