Principal (P)
The original sum of money borrowed in a loan or put into an investment. In simple interest calculations, the principal remains constant throughout the tenure; interest is never added to it to earn more interest.
Rate of Interest (R)
The percentage of the principal charged by the lender for the use of their money. It is almost always expressed as an Annual Percentage Rate (APR). A "12% rate" means you pay ₹12 for every ₹100 borrowed per year.
Tenure (T)
The duration for which the principal is borrowed. It must be expressed in years for the standard formula. If you borrow for 6 months, T = 0.5 years.
Maturity Value (A)
The total amount payable at the end of the loan period. It is the sum of the Principal and the Total Interest. Formula: A = P + I.
Per Annum (p.a.)
A Latin phrase meaning "for each year." It is the standard time unit for interest rates. If a contract says "2% interest," always ask "Per month or per annum?" to avoid a 12x shock.
Flat Rate
A method where interest is calculated on the full original principal for the entire loan term, even if you are making monthly repayments. This makes the effective interest rate much higher than the nominal rate.
Accrued Interest
Interest that has accumulated on a loan or investment but has not yet been paid or received. For example, a bond might accrue interest daily, even if it pays out semi-annually.
Promissory Note
A legal financial instrument where one party promises in writing to pay a determinate sum of money to the other, either at a fixed or determinable future time or on demand, usually with simple interest.