Calculating Interest

Calculating Interest

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Interest is the money paid for the use of money. For example, when you keep money in an account at the bank, the bank pays you interest for the right to use that money while it is deposited.


The rate at which interest is earned is usually expressed as a percentage, called the interest rate.


The formula for interest is 𝐼 = 𝑝𝑟𝑡, where 𝐼 = interest, 𝑝 = principal (the base amount of money), 𝑟 = rate and 𝑡 = time. You'll be given this formula, so don't bother memorizing it. Unless you are told otherwise, assume that time is in years.


For example, imagine you deposit $100 in the bank and are given a 3% rate of interest: 𝐼 = 𝑝𝑟𝑡 = $100 × 0.03 × 1 = $3. In one year, you will have earned $3 in interest. Yay!


A couple notes of caution. First, make sure you can convert the percentage rate of interest to a decimal. Second, watch out for time values that are not exactly a year. You may be required to calculate fractions of a year; for example, 6 months = 1/2 a year, 3 months = 1/4, etc.

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