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Principal
The amount of money borrowed by the borrower or lent by the lender; it also represents the amount still owed on a loan. Principal is usually denoted by the letter P.
Interest rate
The rate at which interest is calculated, usually a percentage of the principal. It is usually denoted by the letter r.
Time
The term or life of the loan, specifying how long the debt must be paid by the borrower or how long until a particular amount of money is received by the lender. Time is usually denoted by the letter t.
Simple Interest formula
I = Prt
What does the concept of the time value of money consider?
The opportunity cost of holding money.
What happens if you just keep cash in your wallet?
It does not grow, unlike when invested.
Simple Interest
is interest calculated on the original principal only. Here, simple interest is set as a percentage of the principal, and is multiplied by the amount of time
Compound Interest
Interest that is earned every year is incorporated into the principal amount and itself earns interest at the same rate.
Compound Interest Formula
A1 = P(1+rt)
A2 = A1(1+rt)
And so on
OR
A = P (1+ r/m)mt
