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interest
interest
interest
MONEY CAN BE RENTED IN
ROUGHLY THE SAME WAY ONE
RENTS AN APARTMENT, ONLY WITH
MONEY, THE CHARGE IS CALLED
INTEREST INSTEAD OF RENT.
INTEREST
– A CHARGE FOR BORROWED MONEY.
– THE PROFIT IN GOODS OR MONEY
THAT IS MADE ON INVESTED
CAPITAL.
Simple Interest
- is interest that is computed only on the
original sum and not on accrued interest.
I = Pin (3-1)
F = P + Pin = P (1 + in) (3-2)
Where:
P - present sum of money
i - simple annual interest rate (a decimal)
n - period of years
I - the amount of interest you would receive
F - the amount of money due at the end of n years
Simple Interest Example
You have agreed to loan a friend $5000 for 5 years
at a simple interest rate of 8% per year.
a. How much interest will you receive from the
loan?
b. How much will your friend pay you at the end of
5 years?
I = Pin = ($5000)(0.08)(5yrs) = $2000
F = P + Pin = 5000 + 2000 = $7000
Compound Interest
- an interest on top of interest. Any interest owed
but not paid at the end of the year is added to
the balance due.
Where:
P = amount of the principal/ present value
F = P (1+i)n i = Rate of interest
𝑟
w/r: i = n = number of interest periods
𝑚
F = future total amount
n = mxn r = is the nominal annual interest rate
𝑟 (ex. 5%, 10%)
F = P (1+𝑟 mn) m = no. of interest periods each year
F = P (1+ ) 𝑚
mn 𝑚 = 1 (compounded annually);
= 2 (semi-annually); = 4 (quarterly);
= 12 (monthly); = 6 (bimonthly)
Compound Interest
Amount @ the Amount @ the
Interest for
YEAR Beginning of End of Interest
Period
Interest Period Period
1 P Pi P+Pi = P(1+i)
P(1+i)+P(1+i)I
2 P(1+i) P(1+i)i P(1+i)(1+i)
P(1+i)2
P(1+i)2+P(1+i)2i
3 P(1+i)2 P(1+i)2 i P(1+i)2(1+i)
P(1+i)3
n P(1+i)n-1 P(1+i)n-1 i P(1+i)n
Compound Interest Example
You have agreed to loan a friend $5000 for 5 years
at a compound interest rate of 8% per year.
a. How much interest will you receive from
the loan?
b. How much will your friend pay you at the
end of 5 years?
Compound Interest Example
Year Total Interest (I) Owed at Total Amount Due at
Principal (P) the End of Year n the
End of Year n
1 $5000 $5000 x 0.08 = 400 $5000+ 400 =5400
5450 1000
4360 1000
3270 1000
2180 1000
1090 1000
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