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Introduction to Interest

Let’s have an introduction to interest –

When we deposit money in our bank account or financial institutions, we get some extra money for our deposits. This extra money is called the interest.

Similarly when we borrow money from our bank or financial institution, we have to pay them back something a little extra (other than the amount we borrowed). Again this extra amount is called interest.

Interest is charged as a percentage of the amount borrowed (or invested) for a certain fixed period before you repay (or withdraw) your borrowed (or withdrawn) amount.

The amount you borrow or invest is called the Principal, and is represented by ‘P‘.

The percentage of interest – called rate of interest – is usually calculated on an annual basis (per annum), and is represented by ‘R‘.

The time or length of borrowing/investing is called time period, usually given in number of years – sometimes in months or even days – and is represented by ‘T‘.

 

There are two types of interest: Simple interest and Compound interest.

Compound interest is obtained by two ways: through calculation, and by using a formula