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Simple and Compound Interest
Simple and Compound Interest
Simple and Compound Interest
TSERETNI ELPMIS
From the viewpoint of the borrower, interest is the
amount of money paid for the use of borrowed capital.
For the lender, interest is the income produced by the
money which he has lent.
F=P+I
The total amount F to be repaid is equal to the sum of the principal and the total interest
F = P(1 + in)
Ordinary Exact Simple
Simple Interest Interest
Computed on the basis of 12 months Based on the exact number of days in
of 30 days each or 360 days a year. a year, 365 days for an ordinary year
and 366 days for a leap year.
1 interest period = 360 days
1 interest period = 365 or 366 days
Cash-Flow Diagrams
150
is a simply a
graphical 0 1 2 3 4 5 6 7 8
representation of
cash flows drawn on
100
a time scale
COMPOUND INTEREST
n
F = P(1 + i)
n
F = P(1 + i)
Nominal Rate Effective Rate of
of Interest Interest
specifies the rate of interest and a is the exact rate of interest on the
number of interest periods in one principal during one year.
year.
Equation of Value
& GNIDNUOPMOC
payments occur once per year but the compounding is
continuous throughout the year.
mn
F = P(1 + r/m)