Compounding

Simple Interest:
                 I = P*t*r (where p = principal, t = time period, r = rate) 

Compound Interest:
You plan to attend a business school and you are forced to take out $100,000 in a loan at 10%.
What are your monthly payments, given that you will have 5 period of years to pay back the loan?
Solution:

We know,
               rate = 10% = 0.1/ 12  (Always divide by 12 because you want to calculate monthly                                                                 payment so rate should be in month)
              period = 5 years = 5 * 12 = 60 months 
              present value = $100,000

Now using excel calculator,
                                    = pmt (rate, nper, pv, [fv], [type])
                                   = pmt (0.1/12, 60, 100000)
                                   = $2,124

Effective Annual Rate (Formula):
Always Remember,
                      The given rate in the examples are stated rate and stated rate are always less than real or effective rate. So, the formula for the effective annual rate is 
                      EAR = (1+r/k)^{^k}-1    where r = stated rate
                                                                   k = number of period
                               = (1+0.1/12)^{^12} - 1
                               = 10.47%  ( Actually it is because of compounding the rate is higher than 10%)