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Simple Interest Formula (360-day year):
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Simple interest is a quick method of calculating the interest charge on a loan or investment. The 360-day year method (also known as the banker's year) is commonly used in financial calculations as it simplifies interest computation by assuming each month has 30 days.
The calculator uses the simple interest formula with 360-day year:
Where:
Explanation: This formula calculates the interest earned or paid based on a fixed principal amount over a specific period using a standardized 360-day year.
Details: Accurate interest calculation is crucial for financial planning, loan repayment estimation, investment return analysis, and understanding the true cost of borrowing or benefit of investing.
Tips: Enter the principal amount in currency units, annual interest rate as a percentage, and the time period in days. All values must be positive numbers.
Q1: Why use a 360-day year instead of 365?
A: The 360-day year simplifies calculations by standardizing each month to 30 days, making it easier to compute partial year interest and is commonly used in commercial lending.
Q2: How does this differ from compound interest?
A: Simple interest is calculated only on the principal amount, while compound interest is calculated on the principal plus any accumulated interest.
Q3: When is the 360-day method typically used?
A: This method is commonly used in commercial loans, short-term investments, and some bond calculations, particularly in the United States.
Q4: Are there limitations to simple interest calculation?
A: Simple interest doesn't account for the compounding effect, which may underestimate long-term investment growth or loan costs compared to compound interest.
Q5: Can I use this for any currency?
A: Yes, the calculation works with any currency as long as you're consistent with the currency units for both principal and interest.