Study Notes: Simple & Compound Interest
This topic helps us understand how money grows over time, especially when we borrow it or save it. Think of it like paying 'rent' for using someone else's money, or getting 'rent' for letting someone use your money.
1. What is Interest? (The Basics)
Imagine you borrow a toy from your friend. After a week, your friend might ask for the toy back, plus a small chocolate as a thank you for letting you use it. That extra chocolate is like interest.
In money terms:
- When you borrow money, you pay back the original amount plus an extra amount. That extra amount is the interest.
- When you save money in a bank, the bank uses your money. So, they pay you an extra amount. That extra amount is the interest.
2. Simple Interest (SI)
Simple Interest is the easiest type of interest. It's calculated only on the original amount of money you borrowed or saved.
Think of it like this: If you rent a car for 3 days, you pay the same daily rent for each of those 3 days, based on the car's original price. The rent you pay on day 1 doesn't change the rent for day 2.
Key Terms:
- Principal (P): This is the original amount of money you borrow or save.
- Analogy: The original price of the car you rent.
- Rate (R): This is the percentage of the principal that you pay or earn as interest, usually per year.
- Analogy: The percentage of the car's price you pay as rent each day/week. (e.g., 10% per year).
- Time (T): This is how long the money is borrowed or saved, usually in years.
- Analogy: How many days/weeks you rent the car for.
Simple Interest Formula:
The formula to calculate Simple Interest is:
SI = (P × R × T) / 100
- **P