Question

How are interest rates calculated by financial institutions? Financial institutions generally calculate interest as:

a) Interest
b) Principal
c) Time
d) Rate

Answer 1

Financial institutions calculate interest rates based on the principal, rate, and time. Simple interest only considers the principal amount, while compound interest also accounts for accumulated interest.

Step-by-step explanation:

Financial institutions calculate interest rates based on a few factors:

1. Principal: The original amount of money borrowed or invested.
2. Rate: The interest rate expressed as a percentage.
3. Time: The length of time the money is borrowed or invested.

For simple interest, the formula to calculate the interest is: Interest = Principal × Rate × Time. This formula only considers the principal amount.

For compound interest, the formula is more complex and considers the accumulated interest as well. It is calculated as: Future Value = Principal × (1 + Interest Rate)^Time. Then, the compound interest can be found by subtracting the present value of the principal from the future value.