CHAPTER 3: INTEREST AND DISCOUNT Flashcards
Amount of money paid for use of borrowed capital.
Interest (Viewpoint of Borrower)
Income produced by the money which he has lent.
Interest (Viewpoint of Lender)
If interest to be paid is directly proportional to the length of time the amount or principal is borrowed.
SIMPLE INTEREST
Amount of money borrowed and on which interest is charged.
Principal
Amount earned by one of principal during a unit of time.
Rate of Interest
Formula for Rate of Interest
I=Pin
computed on the basis of one banker’s year
Ordinary simple interest
based on the exact number of days, 365 for an ordinary year and 366 for a leap year.
Exact simple interest
Interest earned by principal is not paid at the end of each interest period, but is considered as added to principal, and will also earn interest for succeeding periods.
COMPOUND INTEREST
If r = nominal annual interest rate and m = number of interest periods each year, then interest rate per interest period is i = r/m, and the number of interest periods in n years is mn
CONTINUOUS COMPOUNDING
Specifies the rate of interest and the number of interest periods per year.
NOMINAL RATE OF INTEREST
Equal to the nominal rate if the interest is compound annually, but greater than the nominal rate if the number of interest periods per year exceeds one.
EFFECTIVE RATE OF INTEREST
Annual rate of interest on the principal for 1 yr
EFFECTIVE RATE OF INTEREST
The principal P in the formula F = P(1+i)^n may be considered as the value of compound amount F at present, or the amount which when invested now will become F after n periods.
PRESENT VALUE
On a negotiable paper is the difference between what is the worth in the future and its present worth
DISCOUNT
