Welcome to the blog !!!
In this blog, we will explore the following : 1) Concepts of Simple & Compound Interest 2) Formulas & Calculation.
By end of this blog, you will have a good understanding on how interest works and how it is calculated.
Simple Interest:
Simple Interest is a method of calculating interest on loan/investment where interest is based solely on the principal amount, without taking into account any accumulated interest over time.
Formula: Simple Interest (SI)= Principal Amount (P) * Rate of Interest (R) * Duration (N)
Example1: Suppose you borrow 10000 at an annual interest rate of 7% for a period of 3 years. Calculate the simple interest.
Solution: SI=PRN => 10000 * 0.07 *3 =>210
Do note that the interest rate & duration should be on the same scale( Years or months). Consider for the same example if duration is 18 months. Then duration needs to be converted to years as the interest rate is based on year.
Time Period Conversion: Multiply by 12 to convert year to month and divide by 12 to convert month to year
Example1: Suppose you borrow 10000 at an annual interest rate of 7% for a period of 30 months. Calculate the simple interest.
Solution:
Step 1: Converting Month to Year
N(Duration)=30/12=2.5 Years
Step 2: Calculating Simple Interest
SI=PRN => 10000 * 0.07 *2.5 =>175
Compound Interest:
Compound Interest is a method of calculating interest on loan/investment where interest is calculated based on principal amount and any accumulated interest over time.
Formula: CI = P * (1 + r/n)^(n*t) - P
where
Principal (P): Amount of money invested or borrowed.
Annual Interest Rate (r): The rate at which interest is charged
Compounding Period (n): The number of times the interest is compounded per year.
Time (t): The duration for which the interest is calculated, usually measured in years.
Example1: You invest 5,000 in a bond security with an annual interest rate of 6%. The interest is compounded semi-annually (twice a year) for a period of 5 years. Calculate the total interest earned at the end of the investment.
Solution:
Step 1: Calculating Overall Amount Earned
A = 5,000 * (1 + 0.06/2)^(2*5)
A = 6,720.24
Step 2: Subtracting Principal from Amount
I = A - CI
I = 6,720.24 - 5,000
I = 1,720.24
More Examples & Discussion in the next blog. Stay Tuned.