Application of Business Mathematics
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds.
When money is borrowed, interest is typically paid to the lender as a percentage of the principal, the amount owed to the lender. The percentage of the principal that is paid as a fee over a certain period of time (typically one month or year) is called the interest rate. A bank deposit will earn interest because the bank is paying for the use of the deposited funds. Here, we discussed 2 types of risk: 1) Simple Interest 2) Compound Interest 1) Simple Interest: 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. The simple interest formula is used to calculate the interest accrued on a loan or savings account that has simple interest. The simple interest formula is fairly simple to compute and to remember as principal time’s rate times time. An example of a simple interest calculation would be a 3 year saving account at a 10% rate with an original balance of TK 10,000. By inputting these variables into the formula, TK. 10,000 times 10% times 3 years would be TK 3000. The formula of simple interest is:
[pic]
Where:
P is the loan amount
I is the interest rate
N is the duration of the loan, using number of periods
[pic] TK TK (% Per Year) (Years)
Simple interest is money earned or paid that does not have compounding. Compounding is the effect of earning interest on the interest that was previously earned. As shown in the previous example, no amount was earned on the interest that was earned in prior years.
As with any financial formula, it is important that rate and time are appropriately measured in relation to one another.
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds.
When money is borrowed, interest is typically paid to the lender as a percentage of the principal, the amount owed to the lender. The percentage of the principal that is paid as a fee over a certain period of time (typically one month or year) is called the interest rate. A bank deposit will earn interest because the bank is paying for the use of the deposited funds. Here, we discussed 2 types of risk: 1) Simple Interest 2) Compound Interest 1) Simple Interest: 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. The simple interest formula is used to calculate the interest accrued on a loan or savings account that has simple interest. The simple interest formula is fairly simple to compute and to remember as principal time’s rate times time. An example of a simple interest calculation would be a 3 year saving account at a 10% rate with an original balance of TK 10,000. By inputting these variables into the formula, TK. 10,000 times 10% times 3 years would be TK 3000. The formula of simple interest is:
[pic]
Where:
P is the loan amount
I is the interest rate
N is the duration of the loan, using number of periods
[pic] TK TK (% Per Year) (Years)
Simple interest is money earned or paid that does not have compounding. Compounding is the effect of earning interest on the interest that was previously earned. As shown in the previous example, no amount was earned on the interest that was earned in prior years.
As with any financial formula, it is important that rate and time are appropriately measured in relation to one another.