The charge made for borrowing a sum of money. The rate of interest is the charge made, expressed as a percentage of the total sum loaned, for a stated period (usually one year). Thus, a rate of interest of 15% per annum means that for every £100 borrowed for one year, the borrower has to pay a charge of £15, or a charge in proportion for longer or shorter periods. In simple interest, the charge is calculated on the sum loaned only, thus I = Prt. where I is the interest, P is the principal sum, r is the rate of interest, and t is the period. In compound interest, the charge is calculated on the sum loaned plus any interest accrued in previous periods. In this case, l- P [{1 + r)” – 1 I, where n is the number of periods for which interest is separately calculated. Thus, if £500 is loaned for 2 years at a rate of 12% per annum, com pounded quarterly, the value of n will be 4 x 2 = 8, and the value of r will be 12/4 = 3 %. Thus, l 500 1(1.03)8 – 1 I = £133.38, whereas, on a simple-interest basis, it would be only £120.
In general, interest rates depend on the money supply, the demand for loans, government policy, the risk of nonrepayment as assessed by the lender, and the loan period.
