Editing Interest (section)

===Simple interest===

'''Simple interest''' is calculated only on the principal amount, or on that portion of the principal amount that remains. It excludes the effect of [[compound interest|compounding]]. Simple interest can be applied over a time period other than a year, for example, every month.

Simple interest is calculated according to the following formula:

:<math>\frac {r \cdot B \cdot m}{n} </math>

where 
:''r'' is the simple annual [[interest rate]]
:''B'' is the initial balance
:''m'' is the number of time periods elapsed and
:''n'' is the frequency of applying interest.

For example, imagine that a credit card holder has an outstanding balance of $2500 and that the simple annual [[interest rate]] is 12.99% ''per annum'', applied monthly, so the frequency of applying interest is 12 per year. Over one month,

:<math>\frac{0.1299 \times \$2500}{12} = \$27.06</math>

interest is due (rounded to the nearest cent).

Simple interest applied over 3 months would be

:<math>\frac{0.1299 \times \$2500 \times 3}{12} = \$81.19</math>

If the card holder pays off only interest at the end of each of the 3 months, the total amount of interest paid would be

:<math>\frac{0.1299 \times \$2500}{12} \times 3 = \$27.06\text{ per month} \times 3\text{ months} =\$81.18</math>

which is the simple interest applied over 3 months, as calculated above. (The one cent difference arises due to rounding to the nearest cent.)