Final answer:
Interest is the excess cash received or repaid in addition to the principal amount when lending or borrowing money. It is how banks make profits and it comes in two forms: simple and compound interest. Simple interest is calculated only on the principal, while compound interest also includes accumulated interest.
Step-by-step explanation:
Interest is the excess cash received or repaid over and above the amount lent or borrowed. When dealing with finances, such as banking or lending, interest is an important concept. Banks and other financial institutions earn a profit by lending money at an interest rate. Hence, when borrowers repay what they owe, they pay back the original amount known as the principal, along with a percentage on top of this principal, which is the interest.
There are different types of interest calculations, such as simple interest and compound interest. Simple interest is calculated only on the principal amount, whereas compound interest is calculated on both the principal and the accumulated interest. For example, when you save money in a bank account, you will earn interest at a certain rate. Similarly, when you take out a loan, you will pay interest on the borrowed amount.