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0855 GMATH > Midterm | U1 Simple and Compound Interest > Flashcards

Midterm | U1 Simple and Compound Interest Flashcards

1
Q

It refers to the original sum of money borrowed in a loan or put into an investment.

A

Principal

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2
Q

Charge for the privilege of borrowing money

A

Interest

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3
Q

The income from an invested amount at a given rate for a given time.

A

Interest from the investor’s point of view

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4
Q

Money paid for the use of borrowed money.

A

Interest from the debtor’s point of view

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5
Q

Amount a lender charges for the use of money

A

Interest Rate

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6
Q

Interest Rate is expressed as a (1) of the principal

A
  1. percentage
  2. principal
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7
Q

The interest rate is typically noted on an annual basis known as the β€”

A

annual interest rate

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8
Q

This is the period from the beginning when the money was borrowed (or invested) to the period when the money should be returned with the additional amount (interest).

A

Time

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9
Q

Time is also called as β€” or β€”

A

term of loan / term of investment

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10
Q

It refers to the interest paid on the original principal.

A

SIMPLE INTEREST

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11
Q

It is characterized by a fixed amount earned over time.

A

Simple interest

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12
Q

Usually, simple interest is associated with (1) and (2) which are (3) in nature

A
  1. loans
  2. investments
  3. short-term
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13
Q

Simple interest formula

A

𝐼 = π‘ƒπ‘Ÿt
𝐼 = 𝐹-𝑃

𝐼 : interest
𝑃 : principal
π‘Ÿ : rate of interest
t : time period

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14
Q

We have to note that the time t should be expressed in (1). Unless otherwise stated, it will be assumed that the interest rate is an (2).

A
  1. years
  2. annual interest
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15
Q

Ways to convert time to years s if the period of a loan (or investment) with an annual interest rate is given in days

A
  1. Exact method
  2. Ordinary method
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16
Q

Exact vs ordinary method

A
  1. Exact method: t = number of days /365
  2. Ordinary method: t = number of days /360
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17
Q

Method is used by most businesses.

A

Ordinary method

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18
Q

Time in between two dates . When time is given between two dates, the time in days is determined using:

A
  1. Actual time
  2. Approximate time
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19
Q

Actual time vs approximate time

A
  1. Actual time uses the exact number of days in each month
  2. Approximate time assumes 30 days per month for all months
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20
Q

Methods of computing for the simple interest when time is given between two dates

A
  1. Ordinary Interest for actual number of days/ Banker’s Rule
  2. Ordinary Interest for approximate number of days
  3. Exact Interest for actual number of days
  4. Exact interest for approximate number of days
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21
Q

Ordinary Interest for actual number of days

A

𝐼𝑂 = π‘ƒπ‘Ÿ (π‘Žπ‘π‘‘π‘’π‘Žπ‘™ π‘‘π‘–π‘šπ‘’/360 )

22
Q

Ordinary Interest for approximate number of days

A

𝐼𝑂 = π‘ƒπ‘Ÿ (π‘Žπ‘π‘π‘Ÿπ‘œπ‘₯π‘–π‘šπ‘Žπ‘‘π‘’ π‘‘π‘–π‘šπ‘’/360 )

23
Q

Exact Interest for actual number of days

A

𝐼𝑒 = π‘ƒπ‘Ÿ (π‘Žπ‘π‘‘π‘’π‘Žπ‘™ π‘‘π‘–π‘šπ‘’/365 )

24
Q

Exact interest for approximate number of days

A

𝐼𝑒 = π‘ƒπ‘Ÿ (π‘Žπ‘π‘π‘Ÿπ‘œπ‘₯π‘–π‘šπ‘Žπ‘‘π‘’ π‘‘π‘–π‘šπ‘’/365 )

25
Q

Method of computing that will usually generate the highest simple interest

A

Ordinary Interest for actual number of days (Banker’s Rule)

26
Q

Method of computing that generates the smallest simple interest

A

Exact Interest for approximate number of days

27
Q

Note: Use (1) unless otherwise specified. When we count the number of days in between two dates we do not include the (2) but we include the (3).

A
  1. Banker’s rule
  2. first day
  3. last day
28
Q

The sum of the principal and the interest which is accumulated at a certain time

A

Final Amount

29
Q

Final amount could be the (1) or the (2)

A
  1. Future Value
  2. Maturity Value
30
Q

A term used to refer to the total amount on deposit after the interest earned has been added to the principal.

A

Future Value (of an investment).

31
Q

A term used to refer to the total amount to be repaid to the lender where the amount is the interest due on the loan plus the principal.

A

Maturity Value (of the loan).

32
Q

Final Amount formula for simple interest

A

𝐹 = 𝑃 + 𝐼
𝐹 = 𝑃 + π‘ƒπ‘Ÿπ‘‘
𝐹 = 𝑃(1 + π‘Ÿπ‘‘)

where: F - Final Amount
P - Principal
I – Interest

33
Q

Time it takes before accumuating final amount for simple interest formula

A

𝑑 =((𝐹/𝑃)βˆ’1) / π‘Ÿ

34
Q

It is the interest resulting from the periodic addition of simple interest to the principal to create a new principal every now and then

A

Compound interest

35
Q

Interest is charged (or paid) on interest as well as on principal.

A

Compound interest

36
Q

Compound interest is the sum by which the original principal has been (1) by the (2).

A
  1. increased
  2. end of the term
37
Q

The total accumulated amount at the end of the period which is the original principal plus the compound interest

A

Compound amount or final amount

38
Q

Compound amount formula

A

𝐹 = 𝑃(1 + 𝑖)^𝑛
where 𝑖 = π‘Ÿ/π‘š
and 𝑛 = π‘šπ‘‘

or

𝐹 = 𝑃 (1 +π‘Ÿ/π‘š)^(π‘šπ‘‘)

39
Q

Compound interest formula

A

𝐼 = 𝐹 βˆ’ 𝑃

40
Q

Compound principal formula

A

𝑃 = 𝐹(1 + 𝑖)^(βˆ’π‘›)

41
Q

F (compound)

A

Final amount or Compound amount

42
Q

P (compound)

A

Principal

43
Q

I (compound)

A

Compound Interest

44
Q

i (compound)

A

Interest rate per period or periodic rate

45
Q

t (compound)

A

time or term of investment, expressed in years

46
Q

n (compound)

A

number of conversion periods (or compounding periods) for the whole term

47
Q

m (compound)

A

the number of times interest is computed per year;
the number of conversion periods per year;

48
Q

r (compound)

A

the nominal rate of interest per annum or year

49
Q

Conversion/Compounding Period Value of m
Annually =
Semi-annually =
Quarterly =
Monthly 1=

A

Annually (m= 1)
Semi-annually (m= 2)
Quarterly (m= 4)
Monthly (m= 12)

50
Q

In some business transactions involving money, especially during the onset of the purchase of an expensive good or service, a down payment is required and in most cases, the purchaser makes financing arrangements to cover the remaining amount owed to the seller

A

Cash Value

51
Q

Cash value formula

A

CASH VALUE = Down payment(DP) + Present value of all future payments

52
Q

Cash value formula if no down payment is required

A

CASH VALUE = Present value of all future payments

0855 GMATH (3 decks)

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