The interest calculated on a principal sum and not compounded on the interest earned or charged. Formula used when calculating Simple Interest: I = Prt
Compound Interest
The interest that is calculated using both the principal and the interest that has accumulated in the past. Formula used when calculating Compound Interest: I = P(1+r/n)^nt where n = the number of compounding periods and t = term of the loan or investment.
Compounding Period
The length of the time period that elapses before interest compounds. For example: annually, half-yearly, quarterly, monthly, weekly, daily.
Principal
The initial amount borrowed or invested.
Interest
Borrowing Money – the amount charged for using the bank’s money.
Investing – the amount paid to you for letting the bank use your money.
Interest Rate
The annual percentage of the principal that is charged or paid to you.
Term
The length of time the money is borrowed or invested.
Formula used when calculating Simple Interest: I = Prt
Formula used when calculating Compound Interest: I = P(1+r/n)^nt where n = the number of compounding periods and t = term of the loan or investment.
Investing – the amount paid to you for letting the bank use your money.