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Simple and Compound Interest. - Coggle Diagram
Simple and Compound Interest.
Interest.
The interest, typically expressed as a percentage, can be either simple or compounded.
Interest is the cost of borrowing money, where the borrower pays a fee to the lender for the loan.
Simple Interest.
Simple interest is calculated only on the principal amount of a loan or deposit, so it is easier to determine than compound interest.
Generally, simple interest paid or received over a certain period is a fixed percentage of the principal amount that was borrowed or lent.
Simple interest is based on the principal amount of a loan or deposit.
Compound Interest.
Compound interest is based on the principal amount and the interest that accumulates on it in every period.
Compound interest accrues and is added to the accumulated interest of previous periods, so borrowers must pay interest on interest as well as principal.
Example of Simple interest.
A student obtains a simple-interest loan to pay one year of college tuition, which costs $18,000, and the annual interest rate on the loan is 6%. The student repays the loan over three years.
The amount of simple interest paid is: 3,240=$18,000×0.06×3
and the total amount paid is: $21,240 = $18,000 + $3,240
Formula
P X r x n
r
Annual interest rate.
n
Term of loan, in years.
P
Principal amount
Formula
P x (1 + r)t - P
P
Principal amount
r
Annual interest rate.
t
Number of years interest is applied