Interest rate is the rate at which the interest is paid by borrower for the money that was taken from the lender. Interest rate often change due to inflation and Federal Reserve Board policies.

A rate which is charged or paid for the use of money and is often expressed in terms of annual percentage of the principal.
Interest rate is of two types:
  1. Simple Interest and
  2. Compound Interest
1. Simple Interest: Simple interest can be found by multiplying the interest rate by the principle and by the number of periods.

2. Compound Interest: Compound interest is paid on the original principal and on the accumulated past interest.

When money is borrowed from the bank we pay interest which is the percentage charged based on principal amount for certain duration.
The formula for computing simple interest is

S.I = $\frac{P \times N \times R}{100}$
where P : Principal
N : Time period
R : Rate of interest

The formula for computing compound interest is

A = P(1 + $\frac{r}{n}$ )$^{nt}$
where P : Principal amount
r : Annual interest rate
t : Number of years
n : Number of times interest is compounded per year
A : Amount after time 't'

Solved Examples

Question 1: What will be the balance after 8 years if 2500 is deposited in a bank having an annual interest rate of 7.3% compounded quarterly.
Solution:
 
The compound interest formula is given by

A = P(1 + $\frac{r}{n}$ )$^{nt}$

Given P = 2500, r = 0.073, n = 4, t =8

Plugging in the given values we get

A = 2500(1+ $\frac{0.073}{4})$$^{4(8)}$

A = 4459.45

Therefore the balance after 6 years will b 4459.45
 

Question 2: Find simple interest on Rs 10000 at 12% rate of interest for two year.
Solution:
 
Given P = 10000
      R = 12%
      n = 2

The formula for simple interest is given by

S.I = $\frac{P \times N \times R}{100}$

Plugging in the given values we get,

S.I = $\frac{10000 \times 2 \times 12}{100}$

  
= 2400

Therefore for the given data simple interest is 2400.