FINANCIAL MATH

QUIZ COMPOUND
INTEREST

COMPARISON TABLE BETWEEN SIMPLE

AND COMPOUND INTEREST
SIMPLE INTEREST COMPOUND INTEREST
THE INTEREST IS CONSTANT. IT IS CALCULATED ON THE THE INITIAL CAPITAL CHANGES IN EACH
INVESTED CAPITAL (CO) AND ONLY ONCE. PERIOD BECAUSE THE INTERESTS THAT ARE
SIMPLE INTEREST DOES NOT CONSIDER THE INTEREST CAUSED ARE CAPITALIZED, THAT IS, THEY
CHARGED ON THE INTEREST BECOME CAPITAL." THE INTEREST RATE IS
ALWAYS APPLIED TO A DIFFERENT CAPITAL
WHEN A BANK PAYS INTEREST ON A SAVINGS ACCOUNT, THAN THE PERIODIC INTEREST WILL ALWAYS BE
THE AMOUNT IN THE ACCOUNT INCREASES. HIGHER.
EXAMPLE: IF THE SAVER WHO OPENED A SAVINGS ACCOUNT EXAMPLE: A SAVINGS ACCOUNT IS OPENED AT
IN A BANK IS PENDING THE INTEREST THAT IS SETTLED A CERTAIN BANK WHICH SETTLES THE INTEREST
AND WITHDRAWS IT, THE INTEREST WOULD BE GENERATED QUARTERLY AND THESE ARE NOT WITHDRAWN
AGAIN ON ONLY CAPITAL AH! WE ARE! TALKING ABOUT BY THE SAVER, THEY ARE AUTOMATICALLY
SIMPLE INTEREST. CONVERTED INTO COMPOUND INTEREST.

COMPOUND
INTEREST
Compounding interest can make
savings grow faster or make
borrowing more expensive.
Understand what it is, how it is
calculated, and how to use it to your
advantage.
THREE VARIABLES ARE
INVOLVED IN
COMPOUND INTEREST:

The capital, that is, your money

The interest, that is, the profit you get
And most importantly: The time, that is, the
number of periods in which you will have
the money invested; unlike simple interest
where the time variable does not exist.
AMORTIZATION
ACTIVITY
The amortization activity has to do with the
repayment of a loan and its interest through
partial payments or installments. Compound
interest is the interest that is calculated on the
initial capital plus the accumulated interest4 5.
The relationship between both concepts is that
the interest compound determines the amount
of interest that is paid in each installment and
the balance of the debt that is reduced with
amortization.

3 EXAMPLES IN
WHICH COMPOUND
INTEREST CAN BE
USED
Save.
Savings strategies.
Higher education.

CHARACTERISTICS OF
COMPOUND INTEREST

The initial capital grows in each period

because the interest is added.
The interest rate is applied to a capital that
changes.
Interest increases each period

Elaborado por: SOFIA CAMARGO - DANIELA JIMENEZ - KAREN RODRIGUEZ -

DAVID JARAMILLO - ANDRES SANCHEZ
Fuentes de información:
https://www.pnc.com/insights/es/personal-finance/save/what-is-compound-interest.html
https://www.forbes.com.mx/como-funciona-el-interes-compuesto/
https://prezi.com/8s75pgxxao3b/amortizacion-con-interes-simple-y-compuesto/
 FINANCIAL MATH
QUIZ COMPOUND
INTEREST

INTEREST RATE
RATES

Fixed Interest Rate

It is one that is calculated on a fixed rate, for example 10%. Once agreed, this rate
does not vary.
Floating Interest Rate
It is calculated on a reference rate and varies as the reference rate changes. If the
DTF rate is used as a reference, we must first find out the value of this rate and then
establish what percentage above we are going to establish for the floating rate. For
example, it is defined that the value of the rate will be 2% of the value of the DTF. If
the DTF value is 7%, the interest will be 9% (7% + 2%). If another period is to be
calculated and the DTF is now 7.5%, the interest rate will be 9.5% (7.5% +2%).

Real Interest
As inflation decreases the purchasing power, that is, money decreases its value, we
must calculate the real interest that we are going to earn on the investments. To
know this, the inflation value is deducted from the interest received or paid. Interest
rates try to compensate for the decrease that inflation produces in our purchasing
power.

To calculate Real Interest, continue with the example used above, where a rate of
10% is received for a CDT. If inflation for the year was 6%, the Real interest rate will
be 4%.

Effective Interest Rates

It is the annual expression of the nominal interest depending on the frequency with
which the latter is paid. It involves reinvestment or capitalization of interest.

Example: Calculate the annual effective rate corresponding to the interest rate of
2.4% per year with bimonthly compounding.

Nominal Interest Rates:

These are rates that are capitalized more than once a year.

Example: A nominal rate of 20% compounded quarterly is capitalized 4 times a

year, so the rate at which interest is settled is 5% every 3 months.

Associated Concepts
Devaluation: Loss of value of one currency against another. The opposite case is
called revaluation. Inflation: Economic phenomenon due to which a general
increase in prices occurs.

DTF: These are the initials of fixed-term deposits. The DTF is a widely used rate or
percentage, mainly in the financial system. It is calculated as the weighted average
of the different deposit interest rates used by banks, financial corporations, and
commercial financing companies, to calculate the interest that they will recognize
on term deposit certificates (CDT) with a duration of 90 days.

Elaborado por: SOFIA CAMARGO - DANIELA JIMENEZ - KAREN RODRIGUEZ -

DAVID JARAMILLO - ANDRES SANCHEZ
Fuentes de información:
https://www.pnc.com/insights/es/personal-finance/save/what-is-compound-interest.html
https://www.forbes.com.mx/como-funciona-el-interes-compuesto/
https://prezi.com/8s75pgxxao3b/amortizacion-con-interes-simple-y-compuesto/