The concept of interest is centralized on the idea that money has a time value. Your $1,000 today would not have the same worth 10 years after. When interest come into play, the value of your money grows with time. There are two types of interest: simple or compounding. Simple interest is based only on the original deposit. Compounding interest is based on the original deposit, add to that the accumulated interest. So, to put simply, simple interest increases by multiplication, while compounding interest increases exponentially.
In the given equation for simple interest, <span>I = prt, i is the amount of interest earned, P is the present worth, r is the interest rate and t is the amount of time. But what we really want to know is the future worth of our money, not the interest earned Therefore, the equation should be F (future worth) in terms of P, i and t.
Amount of interest earned = Future worth - Present Worth I = F - P Substituting this to the given equation and simplifying, F - P = Prt F = P + Prt F = P(1 + rt)</span>
