Financial Terms / simple interest

Understanding Simple Interest

Simple interest is a financial tool used to calculate the interest earned on an investment by multiplying the principal amount, rate, and term together.

What is Simple Interest?

Simple interest is a type of interest calculated on the initial amount of a loan or deposit, called the principal. It is calculated for a specific period of time and is typically expressed as an annual percentage rate (APR).

How is Simple Interest Calculated?

Simple interest is calculated by multiplying the principal (P) by the interest rate (r) and the amount of time (t) the money is invested or borrowed for. The formula is I = Prt.

What is the Difference Between Simple Interest and Compound Interest?

The main difference between simple and compound interest is that compound interest is calculated on the principal as well as any accumulated interest. Compound interest is calculated more frequently than simple interest, typically every month or quarter.

Key Points

P is the principal amount
The principal amount, P, is the original amount of money borrowed or lent in a simple interest calculation. It is the base amount from which interest is then calculated.
Simple Interest
Simple interest is the interest calculated on a principal amount for a fixed period of time. It is calculated by multiplying the principal amount, P, by the interest rate, r, and the amount of time, t, over which the interest is calculated.

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