Simple Interest

Simple interest is a quick and easy method to calculate interest on the money, in the simple
interest method interest always applies to the original principal amount, with the same rate of
interest for every time cycle.
Simple Interest Formula

S.I. = P × R × T, where P = Principal, R = Rate of Interest in % per annum,

and T = Time, usually calculated as the number of years. The rate of
interest is in percentage r% and is to be written as r/100.

 Principal: The principal is the amount that initially borrowed from the bank or invested.
The principal is denoted by P.
 Rate: Rate is the rate of interest at which the principal amount is given to someone for a
certain time, the rate of interest can be 5%, 10%, or 13%, etc. The rate of interest is
denoted by R.
 Time: Time is the duration for which the principal amount is given to someone. Time is
denoted by T.
 Amount: When a person takes a loan from a bank, he/she has to return the principal
borrowed plus the interest amount, and this total returned is called Amount.
 Amount = Principal + Simple Interest
 A = P + S.I.
 A = P + PRT
 A = P(1 + RT)

Simple Interest Example

Michael's father had borrowed $1,000 from the bank and the rate of interest
was 5%. What would the simple interest be if the amount is borrowed for 1
year? Similarly, calculate the simple interest if the amount is borrowed for 2
years, 3 years, and 10 years?

Solution:

Principal Amount = $1,000

Rate of Interest = 5% = 5/100 or 0.05.

Time = 1 year, 2 years, 3 years, 10 years

Compound Interest

Compound interest is the interest paid on both principal and interest,

compounded at regular intervals. At regular intervals, the interest so far
accumulated is clubbed with the existing principal amount and then the
interest is calculated for the new principal. The new principal is equal to the
sum of the Initial principal, and the interest accumulated so far.

Compound Interest = Interest on Principal + Compounded Interest at

Regular Intervals

The compound interest is calculated at regular intervals like

annually(yearly), semi-annually, quarterly, monthly, etc

Compound Interest Formula

The compound interest is calculated, after calculating the total amount over a period of time,
based on the rate of interest, and the initial principal. For an initial principal of P, rate of
interest per annum of r, time period t in years, frequency of the number of times the interest
is compounded annually n, the formula for calculation of amount is as follows.
The above formula represents the total amount at the end of the time period and includes
the compounded interest and the principal. Further, we can calculate the compound interest
by subtracting the principal from this amount. The formula for calculating the compound
interest is as follows

In the above expression,

 P is the principal amount

 r is the rate of interest(decimal)
 n is frequency or no. of times the interest is compounded annually
 t is the overall tenure.

It is to be noted that the above-given formula is the general formula when

the principal is compounded n number of times in a year. If the given
principal is compounded annually, the amount after the time period at
percent rate of interest, r, is given as:

A = P(1 + r/100)t, and C.I. would be: P(1 + r/100)t - P .

Compound Interest Example

For example, a sum of $10,000 is deposited at a rate of 10%.
 Total Compount Interest = 6105.1

Total Amount = 1000 + 6105.1 = 7105.1

The simple interest value for each of the years is the same, as the principal on which it is
calculated is constant. But the compound interest is varying and increasing across the years.
Because the principal on which the compound interest is calculated is increasing. The
principal for a particular year is equal to the sum of the initial principal value, and
the accumulated interest of the past years.

Compound Interest Formula - Half Yearly

The interest in the case of compound interest varies based on the period of
computation. If the time period for the calculation of interest is half-yearly,
the interest is calculated every six months, and the amount is compounded
twice a year.

The formula to calculate the compound interest when the principal is

compounded semi-annually or half-yearly is given as:

 A is the amount at the end of the time period

 P is the initial principal value, r is the rate of interest per annum
 t is the time period
 C.I. is the compound interest.
Compound Interest Formula - Quarterly
If the time period for the calculation of interest is quarterly, the interest is
calculated for every three months, and the amount is compounded
4 times a year. The formula to calculate the compound interest when the
principal is compounded quarterly is given as:

 A is the amount at the end of the time period

 P is the initial principal value, r is the rate of interest per annum
 t is the time period
 C.I. is the compound interest.

Monthly Compound Interest Formula

The monthly compound interest formula is also known as the interest

calculated per month i.e., n = 12. Total compound interest is the final
amount excluding the principal amount. The monthly compound interest
formula is expressed as:
CI = P (1 + r/12)12t - P

Daily Compound Interest Formula

When the amount compounds daily, it means that the amount compounds
365 times in a year. i.e., n = 365. The daily compound interest formula is
expressed as:
CI = P (1 + r/365)365t - P