Simple and Compound Interest

Simple Interest

An amount added in which only the original principal bears interest for the entire term.

Simple Interest

(P)(r)(t)

P

Principal

r

Annual interest rate

t

Term or time (years)

Future Value

F = P + I

Interest in terms of years

I = (P)(r)(number of years)

Interest in terms of months

I=(P)(r)(number of months/12)

Ordinary Interest (Io)

Io = (P)(r) (number of days/360)

Exact Interest (Ie)

Ie = (P)( r) (number of days/365)

Compound Interest

An amount added to the principal at the end of a certain period of time, after which the interest is computed on the new principal.

Compound Interest

F = P( 1 + r/m )^tm
I = F – P
m=1 if compounded annually, m=2-semi-annually, m=4-quarterly and m=12-monthly.

F

Future value or compounded amount

I

Interest

P

Original principal

r

Annual interest rate

t

m

Number of times compounded per year