![]() ![]() Where: P is the principal r is the interest rate t is the time periodĬompound interest: Compound interest is interest calculated, not only on the principal, or the amount originally borrowed, but also on the interest that has accrued, or built up, at the time of the calculation. The future value (FV) using simple interest is calculated using the following formula: No interest is calculated in the second year on the $5 interest that was due after the first year, and no interest is calculated in the third year on the interest that was due after two years. Simple Interest: Simple interest is interest paid only on the "principal" or the amount originally borrowed, and not on the interest owed on the loan.įor example, the simple interest due at the end of three years on a loan of $100 at a 5% annual interest rate is $15 (5% of $100, or $5, for each of the three years). Let us look at each of the above methods in detail: Discrete compounding ![]() Discrete (Includes simple and compound interest) 2. There are primarily two ways of calculating interest:ġ. The additional amount earned on your investment is the time value of money and is calculated based on the interest rate. ![]() When you invest a dollar today, you expect to receive more than a dollar after a period of time. ![]()
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