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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.

Types of Interest

1. Simple Interest 2. Compound Interest

Simple Interest

A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate by the principal by the number of periods. When someone lends money to someone else, the borrower usually pays a fee to the lender. This fee is called 'interest'. 'Simple' interest, or 'flat rate' interest. The amount of simple interest paid each year is a fixed percentage of the amount borrowed or lent at the start.

Simple Interest = P x R x T

Where: P is the loan amount R is the interest rate T is the duration of the loan, using number of periods

Example : A student purchases a computer by obtaining a simple interest loan. The computer costs $1500, and the interest rate on the loan is 12%. If the loan is to be paid back in weekly instalments over 2 years, calculate: 1. The amount of interest paid over the 2 years, 2. the total amount to be paid back, Given: principal: 'P' = $1500, interest rate: 'R' = 12% = 0.12, repayment time: 'T' = 2 years

Part 1: Find the amount of interest paid. interest: 'I' = PRT = 1500 0.12 2 = $360 Part 2: Find the total amount to be paid back. total repayments = principal + interest = $1500 + $360 = $1860

Simple interest calculation in Excel is of great interest in personal and business situations. Simple interest is the amount that a dollar invested now will be worth in a given number of periods at a given flat interest rate per period. Although Microsoft Excel does not include a function for determining simple interest, you can use the following formula for this calculation: =P*R*T

Where: P is the loan amount R is the interest rate T is the duration of the loan, using number of periods

Principal Interest 1500 12.00% Interest YEAR YEAR YEAR YEAR YEAR 1 2 3 4 5 180 360 540 720 900

Amount

Usually now, the interest is added onto the principal to figure some new amount after the duration of the loan. Formula of Amount :

or

A=P+I

Example Amount

Principal Interest 1500 12.00% Amount Interest YEAR YEAR YEAR YEAR YEAR 1 2 3 4 5 180 360 540 720 900

(Principal + Interest)

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