Welcome to our lesson on Simple Interest and Compound Interest. These are two fundamental concepts in finance that determine how interest is calculated on money that is borrowed or invested. Understanding the difference between these two methods is crucial for making informed financial decisions.
Simple Interest is the most straightforward method of calculating interest. With simple interest, you earn interest only on the original principal amount. The formula is I equals P times r times t, where I is interest, P is principal, r is the annual interest rate, and t is time in years. For example, if you invest one thousand dollars at five percent simple interest for three years, you earn fifty dollars each year, totaling one hundred fifty dollars in interest.