Q:

What Formula Is Used to Calculate Interest Expense?

A:

Simple interest expense is calculated using the formula e = (principal)(rate)(time), where "e" is the interest expense, "p" is the principal amount, "r" represents the interest rate and ''t" is the time elapsed (in years). Such calculations are used only when interest is not compounding.

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For example, an initial investment of \$2,000 with 3% yearly interest over 5 years would yield \$300 in interest expense (2000 × .03 × 5).

In cases where the interest compounds more than once per year, the formula a = p(1 + r/n)nt is used, with "a" equal to the amount accumulated at the end of the period, "p" equal to the principal amount, "r" referring to the interest rate, "n" representing the number of times compounding annually, and "t" the number of years the amount is deposited or borrowed for.

For example, \$1,500.00 deposited into an account with an annual interest rate of 4.3%, compounded quarterly, grows to \$1,938.84 after six years (1,500(1 + 0.043/4)4(6)).