The cost of borrowing money (or return on lending) is affected by the interest rate, the duration of the loan and any compounding.
(1) initial amount of money (principal)
(2) percent interest rate, expressed as a decimal fraction
(3) number of years involved
(4) number of times interest compounded during the year
For simple interest, there is no compounding during the life of the loan and:
amount due =
= (initial amount) * (1 + ((number of years) * (interest rate as a decimal fraction)))
For interest compounded during the year:
= (initial amount) * ((1 + ((interest rate as a decimal fraction) / (number of times compounded per year))) ^ ((number of years) * (number of times compounded during year)))
Number of Times Per Year
If the final amount due is known, then the equations can be reversed to determine the initial amount.
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