Accounting and Finance Foundations

Unit 10

Accounting and Finance Foundations Unit 10: Credit 775

Credit

Chapter 22

Lesson 22.9 Calculating Interest and the

Time Value of Money

You’ve already learned that all finance charges and interest rates must be clearly stated when entering into

a credit contract. To determine the amount you have to pay, you must understand four things:

Interest: the fee that lenders charge borrowers for the use of credit

Interest Rate: the percentage figure used in calculating interest charges; also known simply as “rate”

Principal: the amount of money borrowed

Time: the length of time for which interest will be charged

Interest, the interest rate, the principal, and the time are all related. The following formulas show

that relationship:

Interest = Principal x Rate x Time

Principal = Interest / (Rate x Time)

Rate = Interest / (Principal x Time)

Time = Interest / (Principal x Rate)

The easiest way to remember the formula for calculating interest is below:

Depending on what you are solving for—interest, principal, rate or time—the circle can help you remember

the proper formulas.

Interest

Principal x Rate x Time

Student Guide