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Understanding Interest: Simple vs. Compound Calculations

Discover the world of interest calculations - from simple interest based on the principal amount to compound interest that includes previous earnings. Learn the formulas and methods to find total loan amounts and compounded interest. Dive into the concepts to master financial calculations.

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Understanding Interest: Simple vs. Compound Calculations

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  1. Percent and Problem Solving: Interest 7.6

  2. Calculating Simple Interest Interest is money charged for using other people’s money. Money borrowed, loaned, or invested is called the principal amount, or simply principal. The interest rate is the percent used in computing the interest (usually per year). Simple interest is interest computed on the original principal.

  3. Simple Interest simple Interest =Principal •Rate or I =P•R•T where the rate is understood to be per year and time is in years.

  4. Finding the Total Amount of a Loan total amount (paid or received) = principal + interest

  5. Calculating Compound Interest Compound interest is computed on not only the principal, but also on the interest already earned in previous compounding periods. If interest is compounded annually on an investment, this means that interest is added to the principal at the end of each year and next year’s interest is computed on this new amount.

  6. Compound Interest Formula The total amount A in an account is given by where P is the principal, r is the interest rate written as a decimal, t is the length of time in years, and n is the number of times compounded per year.

  7. Finding Total Amounts with Compound Interest total amount = original principal • compound interest factor The compound interest factor comes from the compound interest table found in Appendix C of the textbook.

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