📘 1. Definition
An interest rate is the percentage charged or earned on a sum of money over a period of time.
It represents the cost of borrowing money or the reward for saving or investing money.
Example:
If you borrow $1,000 at a 10% annual interest rate, you will owe $1,100 after one year.
💳 2. Where Are Interest Rates Used?
| Area | Description |
|---|---|
| Loans/Credits | The cost you pay to the bank for using their money |
| Deposits | The amount the bank pays you for keeping money with them |
| Investments | The return you earn on your invested capital |
🔢 3. How Is Simple Interest Calculated?
✅ Formula for Simple Interest:
Interest=P×r×t100\text{Interest} = \frac{P \times r \times t}{100}
Where:
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P = Principal (initial amount)
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r = Annual interest rate (%)
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t = Time in years
🧮 Example of Simple Interest:
You borrow $1,000 at a 10% annual interest rate for 2 years:
Interest=1000×10×2100=$200\text{Interest} = \frac{1000 \times 10 \times 2}{100} = \$200
You’ll repay $1,200 after 2 years.
🔁 4. Compound Interest
Compound interest means that the interest is calculated not just on the principal, but also on previously earned interest.
📍 Formula for Compound Interest:
A=P×(1+rn)ntA = P \times \left(1 + \frac{r}{n}\right)^{nt}
Where:
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A = Final amount (principal + interest)
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P = Principal amount
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r = Annual interest rate (in decimal)
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n = Number of compounding periods per year
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t = Time in years
📊 5. Types of Interest Rates
| Type | Description |
|---|---|
| Annual Rate (APR) | Most common — total yearly interest charge |
| Fixed Rate | Does not change during the term |
| Variable Rate | Can change based on market or central bank conditions |
| Nominal Rate | The stated rate, not adjusted for inflation |
| Real Interest Rate | Adjusted for inflation — shows actual gain/loss in value |
⚠️ 6. Why Interest Rates Matter
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📉 Loans: Higher interest = more expensive borrowing
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📈 Deposits: Higher interest = better savings income
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💼 Investments: Help compare returns between different options
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⏳ Time Value of Money: Interest explains how money grows or shrinks over time
🏦 7. Example from Uzbekistan
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Central Bank of Uzbekistan sets a base interest rate (around 14% in 2024)
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Commercial banks offer loans at 18%–28% annual rates
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Deposits may earn 10%–24% annually, depending on the term
🧠 Summary
Interest rates are fundamental in all financial activities — from loans and savings to investments.
Understanding how they are calculated and how they work will help you make smarter financial decisions.