Interest
Interest is money paid by a borrower to a lender for a credit or a similar liability.
Contents
Description
Important examples are bond yields, interest paid for bank loans, and returns on savings. Interest differs from profit in that it is paid to a lender, whereas profit is paid to an owner.
In economics, the various forms of credit are also referred to as loanable funds.
Interest rate
When money is borrowed, interest is typically calculated as a percentage of the principal, the amount owed to the lender. The percentage of the principal that is paid over a certain period of time (typically a year) is called the interest rate.
Interest rates are market prices which are determined by supply and demand. They are generally positive because loanable funds are scarce.
Compounded interest
Interest is often compounded, which means that interest is earned on prior interest in addition to the principal. The total amount of debt grows exponentially, and its mathematical study led to the discovery of the number e.
Calculation
In practice, interest is most often calculated on a daily, monthly, or yearly basis, and its impact is influenced greatly by its compounding rate.
See also
External links
- Interest @ Wikipedia
