Introduction on how to solve interest problems : Simple interest: |
Simple interest is money we can gain by initially investing some money (the principal). A percentage (the interest) of the principal amount is added to the principal, it will make our initial investments grow.
In compound interest we can learn how our money is growing over time with compound interest.
Solve Interest Problems : Solved Example for Simple Interest:
We want to solve the interest on $1000 at 10% interest per year after 2 year(s) in the simple interest form.
The formula for solve simple interest problem is:
I = P * r * t
P is the principal amount, $1000.00. r is the interest rate, 10% per year, or in decimal form, 10/100=0.1. t is the time involved, 2....year(s) time periods. So, t is 2....year time periods.
To find the simple interest, we multiply 1000 × 0.1 × 2 to get that:
Therefore the interest is: $200.00.
Generally now, the interest is added onto the principal to figure some new amount after two year(s), or 1000.00 + 200.00 = 1200.00. Solve Interest Problems : Solve Compound Interest:
We want to solve our new principal from compound interest problem:
an initial investment of $500 at 5% annual interest, compounded 2 times per year, After 2 year(s).
In this problem the annual interest rate attached to our money is 5%. Since it is compounded 2 times a year, the interest rate at each compounding time is 5% ÷ 2 or 2.5%.
Before we start, be sure to convert our interest rate at the time of compounding, 2.5%, into a decimal by dividing it by 100, so 2.5% becomes 0.025 for calculation purposes.
The new principal can be found by applying this formula:
New Principal = Current Principal × (1 + r)
Where r is our interest rate at the time of compounding, in this case 2.5% (or 0.025 in the calculations).
Year 1, compounding time #1
Our new principal $500.00 + $12.50 = $512.50
Year 1, compounding time #2
Our new principal $512.50 + $12.81 = $525.31
Year 2, compounding time #1
Our new principal $525.31 + $13.13 = $538.45
Year 2, compounding time #2
Our new principal $538.45 + $13.46 = $551.91
Mathematically though, this is equivalent to multiplying our original principal by the factor (1+0.025)4.
If we do this, we will get our final amount is:
$500.00 * (1+0.025) 4 = $ 551.91
Therefore after two years we can get $551.91.
Know more Simple Interest i found this interesting link What is a Function
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