The interest formula includes two types of interests. These are simple interest and compound interest. In this sub-topic, we will learn both types of formulas.

Simple Interest Formula

When the money paid as interest is the same every year, the interest is called simple interest.

Key Point

• The formula for calculating simple interest is:
  I = P × r × t
• where, I is interest earned, P is principal (amount invested), r is rate of interest (as a decimal) and t = time
• The total amount owing can then be calculated by adding I to P. That is,
  A = P + I

Compound Interest Formula

The compound interest is calculated after calculating the total amount over a period of time based on the rate of interest and the initial principal.

Key Point

• If a principal P is invested at an annual rate of r, compounded annually, then the amount after t years is given by
  A = P(1 + r)t