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Add up all the interest paid/payable in a period. Divide that by the principal at the beginning of the period. E.g. on
100 (principal):
credit card debt where 1/day is charged. 1/100 = 1%/day.
corporate bond where 3 is due after six months, and another 3 is due at year end. (3+3)/100 = 6%/year.
certificate of deposit (GIC) where 6 is paid at year end. 6/100 = 6%/year.
There are three problems with simple interest.
The time periods used for measurement can be different, making comparisons wrong. You cannot say the 1%/day credit card interest is 'equal' to a 365%/year GIC.
The time value of money means that 3 paid every six months hurts more than 6 paid only at year end. So you cannot 'equate' the 6% bond to the 6% GIC.
When interest is due, but not paid, it must be clear what happens. Does it remain 'interest payable', like the bond's
3 payment after six months? Or does it get added to the original principal, like the 1%/day on the credit card? Each time it is added to the principal it 'compounds'. The interest from that time forward is calculated on that (now larger) principal. The more frequent the compounding, the faster the principal grows, and the greater the interest.
In order to solve these three problems, there is a convention that interest rates will be disclosed as if the term is one year and the compounding is yearly. The discussion at compound interest shows how to convert to and from the different measures of interest.
Real interest:
This is calculated as (nominal interest rate) - (inflation). It attempts to measure the value of the interest in units of stable purchasing power. See the discussion at real interest rate.
Cumulative interest/return:
This calculation is (FV/PV)-1. It ignores the 'per year' convention and assumes compounding at every payment date. It is usually used to compare two long term opportunities. Since the difference in rates gets magnified by time
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