Many financial problems are based on the concept of charging a fee (interest) for the use of someone else's money for a fixed period of time. The phrase time value of money describes the calculations based on such problems.
There are two main types of financial problems:
With simple interest, only the principal (the original amount of money) earns interest for the entire life of the transaction. The principal, plus interest earned is repaid in one lump sum.
When simple interest is added to the principal at specified compounding intervals, and thereafter, also earns interest, the interest is compounded. Savings accounts, mortgages and leases are compound-interest calculations.