College of Engineering

Engineering Economics (Activity No. 1)

RESEARCH THE DEFINITION OF THE FOLLOWING

1. What is Interest?
Interest is the monetary charge for the privilege of borrowing money,
typically expressed as an annual percentage rate (APR). Interest is the
amount of money a lender or financial institution receives for lending out
money.

2. What is Simple Interest?

Simple interest is interest calculated on the principal portion of a loan or
the original contribution to a savings account. Simple interest does
not compound, meaning that an account holder will only gain interest on
the principal, and a borrower will never have to pay interest on interest
already accrued.

3. What is Principal?
The amount you borrow with your mortgage is known as the principal.
Each month, part of your monthly payment will go toward paying off that
principal, or mortgage balance, and part will go toward interest on the
loan.

4. What is Rate of Interest?

The interest rate is the amount a lender charges a borrower and is a
percentage of the principal—the amount loaned. The interest rate on a
loan is typically noted on an annual basis known as the annual percentage
rate (APR). An interest rate can also apply to the amount earned at a bank
or credit union from a savings account or certificate of deposit
(CD). Annual percentage yield (APY) refers to the interest earned on
these deposit accounts.

5. What is Ordinary Interest?

Interest computed on a 360-day year, using 12 months of 30 days, instead
of a 365-day year. For instance, Treasury bill yields are quoted on a 360-
day year. Corporate bonds, mortgages, and consumer installment loans
with precomputed interest earn ordinary interest. With larger amounts
invested, the difference between ordinary interest and exact interest (a
365 day-year) can be substantial.
6. What is Exact Interest?
Interest paid by a financial institution that is calculated on a 365-days-per-
year basis. This contrasts with ordinary interest, which is calculated on a 360-
day basis. When a very large amount of money is drawing interest, the
difference between exact interest and ordinary interest can be significant.
7. What is the difference between Ordinary Interest and Exact Interest?

Ordinary Interest that is based on a 360-day year instead of a 365-day

year. In contrast, exact interest is based on a 365-day year. If large sums
of money are involved, the difference can be significant. The ratio
of ordinary interest to exact interest is 1 : 1.0139.
8. Derive the formula of Simple Interest.
A=P(1+rt)

9. What is Compound Interest?

Compound interest (or compounding interest) is the interest on a loan or
deposit calculated based on both the initial principal and the accumulated
interest from previous periods. Thought to have originated in 17th-century
Italy, compound interest can be thought of as "interest on interest," and
will make a sum grow at a faster rate than simple interest, which is
calculated only on the principal amount.

10. Derive the formula of Compound interest.

A=P(1+r/n)^nt