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Interest is the price charged to borrow money, and is typically expressed as a percentage of the principal, or the amount loaned.

Someone who borrows money from a bank to buy a house or open a business will pay interest on the loan. The bank makes money from the interest it charges, while the borrower pays the interest for the privilege of using the loan.

Interest rates are either simple or compounding. With simple interest, the rate paid is a fixed percentage of the loan. In compounding interest, both the principal and the accumulating interest are subject to interest fees.  

Joe borrows $40,000 from a bank to buy a new car. If he has five years to repay the loan and the bank charges a simple interest rate of 4%, Joe will pay $8,000 in interest, plus the principal. To calculate the interest paid, multiply the principal by the interest rate and then by the time of the loan.  

Joe also puts $1,000 into an investment that offers 5% annual compounding interest. After three years, that investment will increase to $1,157.63 thanks to the power of compounding interest. To calculate the compounding interest, multiply the principal amount by one plus the annual interest rate raised to the number of compound periods minus one.

Interest also refers to a stockholder’s ownership in a company, usually expressed as a percentage. For example, an investor who holds more than 5% of a company’s outstanding shares holds a significant interest in the company.

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