Interest is a fee paid by a borrower of assets to the owner as a form of
compensation for the use of the assets. It is most commonly the price paid for the
use of borrowed money, or money earned by deposited funds.
When money is borrowed, interest is typically paid to the lender as a percentage
of the principal, the amount owed to the lender.
The percentage of the principal that is paid as a fee over a certain period of time
(typically one month or year) is called the interest rate.
A bank deposit will earn interest because the bank is paying for the use of the
Assets that are sometimes lent with interest include money, shares, consumer
goods through hire purchase, major assets such as aircraft, and even entire
factories in finance lease arrangements.
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The interest is calculated upon the value of the assets in the same manner as
Interest is compensation to the lender, for a) risk of principal loss, called credit
risk; and b) forgoing other investments that could have been made with the
loaned asset. These forgone investments are known as the opportunity cost.
Instead of the lender using the assets directly, they are advanced to the borrower.
The borrower then enjoys the benefit of using the assets ahead of the effort
required to pay for them, while the lender enjoys the benefit of the fee paid by the
borrower for the privilege. In economics, interest is considered the price of credit.
Interest is often compounded, which means that interest is earned on prior
interest in addition to the principal.
The total amount of debt grows exponentially, and its mathematical study led to
the discovery of the number e
Simple interest or flat rate interest can be calculated by formula shown below:
Formula of simple interest is = Principal × Rate × Time. Where, principal is the
amount lent or borrowed, 'rate' is the Percentage of principle charged as interest
each year and 'time' is the time in years of loan.
We can write this formula as
I = P R T,
Where 'I' refers to interest, 'p' refers to principle, 'r' refers to interest rate and
't' refers to time.
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Using this formula we can find p, r, t.
p = i/rt,
t = i/pr,
r = i/pt,
Whenever money is borrowed then total amount is equals to principle amount plus
interest so we can say that
* total repayments = (principal + interest).
Usually amount is paid back in regular installments either monthly or weekly
* monthly payment amount = principle + interest/ loan Period (T) in months.
* weekly payment amount = principle + interest/loan period (T) in weeks.
When time 'T' is given in years.
In this case we convert time 'T' from years to months, to do this we will multiply 'T'
by 12, because there are 12 months in a year.
For example: Suppose 'x' purchases a computer on loan. Computer cost is $ 1500,
'r' is 12 % if loan is paid back in weekly installments over 2 years. Then Simple
Interest can be calculated as:
Interest (I) = PRT,
=1500 * 12 * 2 / 100
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