Interest is the amount paid by the borrower to the lender or is the money earned on the deposited funds. Interest is paid or earned as a percentage of the amount borrowed or invested, called principal. The percentage of the principal that is paid as a fee or earned as an interest is called the interest rate. The amount to interest depends on the interest rate, the amount of money borrowed (principal) and the length of time that the money is borrowed.
Compound interest is paid on the original principal and on the accumulated past interest. It arises when interest is added to the principal, so that, from that moment on, the interest that has been added also earns interest. This addition of interest to the principal is called compounding.
A bank account may have its interest compounded every year. An account with initial principal of $100 and 10% interest per annum would have:
at the end of first year: $100 + 10% of $100 = $110
at the end of second year: $110 + 10% of $110 = $121
at the end of third year: $121 + 10% of $121 = $133.10
and so on.
The below written formula is used to find the compound interest:
A = P × (1 + r)n
P = principal (initial amount)
r = annual rate of interest
n = number of years
A = amount of money accumulated after n years, including interest
Example: If we solve the above problem using formula we get:
A = 100 × (1 + 10/100)3
= 100 × (1.1)3 = $133.10
If the interest is paid more frequently then the following formulas can be used depending on the frequency.
Annually, A = P × (1+ r)
Half yearly, A = P × (1 + r/2)2
Quarterly, A = P × (1 + r/4)4
Monthly, A = P × (1 + r/12)12
SchoolTutoring Academy is the premier educational services company for K-12 and college students. We offer tutoring programs for students in K-12, AP classes, and college. To learn more about how we help parents and students in Hamilton visit: Tutoring in Hamilton.