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Interest is the amount of money paid or earned for the use of money.
An interest rate is the cost stated as a percent of the amount borrowed per period of time, usually one year.
For a savings account, interest is earned. For a loan, interest is paid.
It is earned by money P (called the principal) at an annual interest rate r for t years is given by:
I = PTR/100
I = Interest,
P = Principal,
T = Time and
R = Rate or interest.
Im CI the amount of the first period becomes the prinicipal for the second period so in this method we are calculating the interest for the interest also.
The Compound Interest Equation
C = P (1 + r/n) ^nt
C = future value
P= Principal or initial deposit
r = interest rate (expressed as a fraction: eg. 0.06)
n = # of times per year interest in compounded
t = number of years invested