Interest charged on the initial
principal for the current period for monies
borrowed, and also on interest amounts
accrued from previous periods. With compound
interest, interest is charged at specified
intervals (e.g., monthly, daily, quarterly).
When expressed as a formula, the
calculation for simple interest is as
follows:
Principal x Interest Rate x Time
Period = Interest
P x i x n = I
In the case of
compound interest, interest is charged at a
specified time interval (e.g., monthly,
daily, quarterly) with the result that:
Each time period, the original sum
is reinvested and continues to earn
interest.
The interest earned during each
period is reinvested and also continues
to earn interest.
The equation to
determine the compound amount (principal and
compound interest), at a particular time is:
A = P(1+ i)n
A- Compound
Amount
P- Principal
Amount
1- Represents a
unit of value
i- Interest
Rate per compounding period
n- Number of
time periods (e.g., squared, cubed,
etc.—expressed as a power)
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