Professional Documents
Culture Documents
What Is Simple Interest
What Is Simple Interest
Is the most basic type of interest. In order to understand how various types of
transactions work, it helps to have a complete understanding of simple interest. For
example, you may pay interest on a loan, and it is important to understand how interest
works. Better yet, your bank may be paying you interest on your deposits and you can
maximize your earnings by knowing more about interest.it is also fee paid by a
borrower to the lender for the privilege of using his money. This fee is a percentage of
the loan amount. Simple interest can be paid to a lender by a person who took out a
loan, or paid to a person depositing money into a bank account. When you deposit
money into a bank, you are essentially loaning it to the bank. Simple interest is the
amount initially charged on a loan, and does not take into account the compounding of
interest over time.
The present value of “P” is that principal which is invested on the given date at the
given interest rate will amount to “F” on the date “F” due. The compound discount
is the difference of F – P and the process of finding present value is called
“discounting”.
To get the present value of a future amount, we simply solve the compound amount
of formula “P”.
F
P=
(1+i) n
However, this relationship is often expressed using negative exponents.
-n
P = F (1+i)
Like the the compound amount, finding the present value “P” has several methods.
Example: Find the present value of ₱ 20,000 due in 3 yrs. If the interest rate is 5%
converted semi-annually.
Solution:
5% 1
i= =2 ; n = 2 x 3 = 6; F = ₱20,000
2 2
-n
P = (1+i)
-6
= 20,000 x 1 + 21 %
2
= 20,000 (0.86229687)
= ₱ 17,245.94
4. What are the difference of types of simple interest compare and contrast
each.
Simple interest - means Interest that is calculated solely as a percentage of the
principal
* Flat interest – is a special case of simple interest. It is most often used when a
financial obligation, such as being discharged by a series of a equal partial payments
(installments) over the term over the (length) of the obligation, rather than by one
or more amounts repaid at irregular intervals
* Compound - interest means that the interest will include interest calculated on
interest.
5. What is Bank Discount?
Interest deducted in a lump sum by a bank from a loan when the loan is made: it is
computed from the date of the loan to the date of the final payment on the basis of the
original amount of the loan.