Components of Interest Calculation

This page outlines the three essential elements needed to calculate interest payments or earnings.

Vocabulary:

• Principal: The initial amount borrowed or loaned
• Interest Rate: Annual percentage charged or earned
• Time: Duration of the loan or investment

Highlight: The Simple Interest Formula is I = P.R.T (Interest = Principal × Rate × Time)

Example: Time conversion examples:

• 8 months = 8/12 years
• 12 weeks = 12/52 years
• 80 days = 80/365 years

Understanding Simple vs Compound Interest

This page explains the fundamental differences between simple and compound interest calculations.

Definition: Balance is the total amount combining the principal and accumulated interest.

Example: For a $1,000 investment at 2% interest:

• Simple Interest: After 2 years = $1,040 ($20 interest per year)
• Compound Interest: After 2 years = $1,040.40 (interest earned on previous interest)

Highlight: Simple interest is calculated only on the principal, while compound interest is calculated on both principal and accumulated interest.

Practical Interest Calculation

This page demonstrates a real-world application of simple interest calculation.

Example: Serena's savings account calculation:

• Principal: $250
• Interest Rate: 3% (0.03)
• Time: 2 years
• Interest Earned: $15

Highlight: Always convert percentage rates to decimals when calculating interest $e.g., 3$.

Quote: "After 2 years, Serena would earn $15 in interest."

Understanding Interest Basics

This introductory page explains the fundamental concept of interest in banking transactions.

Definition: Interest is a fee paid for borrowing money or received for lending money through banking institutions.

Highlight: Banks pay interest to depositors as compensation for using their money to lend to others.

Example: When you deposit money in an interest-bearing account, you earn interest from the bank. Conversely, when you borrow money, you pay interest to the bank.