Last updated on August 5th, 2025
In finance, understanding how interest works is crucial. There are two primary types of interest: simple interest and compound interest. Simple interest is calculated on the principal amount, while compound interest is calculated on the principal amount and also on the accumulated interest of previous periods. In this topic, we will learn the formulas for simple and compound interest.
Interest can be calculated using simple or compound formulas. Let’s learn the formula to calculate both simple and compound interest.
Simple interest is calculated on the initial principal for the entire period of the loan or investment.
The formula for simple interest is:
Simple Interest (SI) = (Principal × Rate × Time) / 100
Compound interest is calculated on the principal and also on the accumulated interest of previous periods.
The formula for compound interest is:
Compound Interest (CI) = Principal × (1 + Rate/100)Time - Principal
In finance, simple and compound interest formulas are essential for analyzing and understanding the growth of investments or the cost of loans.
Here are some important aspects of simple and compound interest:
Students often find the interest formulas tricky and confusing. Here are some tips and tricks to help master simple and compound interest formulas:
Interest formulas are widely used in various fields and real-life situations. Here are some applications of simple and compound interest: -
Students often make errors when calculating simple and compound interest. Here are some common mistakes and ways to avoid them to master these concepts.
Calculate the simple interest on a principal of $1,000 at a rate of 5% per annum for 3 years.
The simple interest is $150
Using the simple interest formula:
SI = (Principal × Rate × Time) / 100
SI = (1000 × 5 × 3) / 100 = $150
Find the compound interest on a principal of $2,000 at a rate of 4% per annum for 2 years.
The compound interest is $163.20
Using the compound interest formula:
CI = Principal × (1 + Rate/100)Time - Principal
CI = 2000 × (1 + 4/100)2 - 2000 = $163.20
Determine the total amount after 5 years if $500 is invested at a simple interest rate of 6% per annum.
The total amount is $650
First, calculate the simple interest:
SI = (Principal × Rate × Time) / 100
SI = (500 × 6 × 5) / 100 = $150
Total amount = Principal + SI = 500 + 150 = $650
If $1,500 is invested at a compound interest rate of 3% per annum, how much will it grow to after 4 years?
The amount will grow to $1,688.11
Using the compound interest formula:
Amount = Principal × (1 + Rate/100)Time
Amount = 1500 × (1 + 3/100)4 = $1,688.11
What is the simple interest earned on a loan of $750 at 7% per annum over 2 years?
The simple interest earned is $105
Using the simple interest formula:
SI = (Principal × Rate × Time) / 100
SI = (750 × 7 × 2) / 100 = $105
Jaskaran Singh Saluja is a math wizard with nearly three years of experience as a math teacher. His expertise is in algebra, so he can make algebra classes interesting by turning tricky equations into simple puzzles.
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