The word interest means the extra amount earned by the investor along with the investment (or) the amount owed by the borrower along with the amount lent.
There are two types of interests
- Simple interest
- Compound interest.
Principal: The principal is the amount that was initially borrowed (loan) from the bank or invested.
The principal is denoted by P.
Rate: Rate is the rate of interest at which the principal amount is given to someone for a certain time, the rate of interest can be 5%, 10%, or 13%, etc.
The rate of interest is denoted by R.
Time: Time is the duration for which the principal amount is given to someone.
Time is denoted by T or N
Simple Interest
$\text{Simple Interest} = \frac{P \times N \times R}{100}$
Then, what is compound Interest ?
compound interest is interest that is calculated on the principal amount and any interest that has accumulated over previous periods
We consider R = R/100
P is a Previous Year Amount
| Year | Interst | Amount (P+Interest) |
| 0 | 0 | P |
| 1 | = P N R = P 1 R = P R | P + PR = P(1+R) |
| 2 | = P N R = [P(1+R)] 1 R = [P(1+R)] R | P(1+R) + P (1+R) R = P(1+R) (1+R) = P(1+R)² |
Amount for 2 years = P(1+R)²
.
.
$\text{Amount for } N \text{ years} = P(1 + R)^N$
Compound Interest = Amount - Principal
*R = R/100
So compound Interest is cumulative of simple Interest.