Interest is a fee charged by banks for borrowing funds. Also, this is extra money you can earn depositing money into a savings account. For both loans and deposits, the ultimate amount exceeds the principal amount. In banking, the principal is defined as the original amount of money lent or borrowed, which is used to calculate interest. There are two types of interest. They differ in the way they’re calculated: simple and compound.
It is charged on the principal amount of a loan with no compounding effect. Simple interest is calculated using the formula:
p × i × t = Is
p is the principal amount borrowed or lent
i is the interest rate or the percentage charged on the principal (converted into a decimal form)
t is the number of periods
Is is simple interest on a loan or deposit over a period of time
So, this deposit will bring $300 for the whole period of 3 years.
Also referred to as ‘interest on interest‘, this is charged on the principal amount plus all the interest accruing over time. Compound interest is calculated using the formula below:
p (1 + i)n – p = Ic