Saini
Chapter- 6
Borrowing and lending are two sides of the same transaction. The amount borrowed/loaned is called the principal. To the borrower, the principal is a debt; to the lender, the principal represents an investment.
The interest paid by the borrower is the lender's investment income. There are two systems1 for calculating interest. * Simple interest is a system whereby interest is calculated and paid only on the principal amount. Simple interest is used mainly for short-term loans and investments. (By “short-term” we mean durations of up to one year.) Chapters 6 and 7 cover the mathematics and applications of simple interest. * Compound interest is a system whereby interest is calculated and added to the original principal amount at regular intervals of time. For subsequent periods, interest is calculated on the combination of the original principal and the accumulated (or accrued) interest from previous periods. Compound interest is used mainly (but not exclusively) for loans and investments with durations longer than one year. Chapters 8 and beyond cover the mathematics and applications of compound interest.
The rate of interest is the amount of interest (expressed as a percentage of the principal) charged per period. Simple interest rates are usually calculated and quoted for a one-year period. Such a rate is often called a per annum rate. That is,
Note: If a time interval (such as “per month”) is not indicated for a quoted interest rate, assume the rate is an annual or per annum rate.
The rate of interest charged on a loan is the lender's rate of return on investment. (It seems more natural for us to take the borrower's point of view because we usually become borrowers before we become lenders.)
If you “go with your intuition,” you will probably correctly calculate the amount of simple interest. For example, how much interest will $1000 earn in six months if it earns an 8% rate of interest? Your thinking probably goes as follows: “In
Borrowing and lending are two sides of the same transaction. The amount borrowed/loaned is called the principal. To the borrower, the principal is a debt; to the lender, the principal represents an investment.
The interest paid by the borrower is the lender's investment income. There are two systems1 for calculating interest. * Simple interest is a system whereby interest is calculated and paid only on the principal amount. Simple interest is used mainly for short-term loans and investments. (By “short-term” we mean durations of up to one year.) Chapters 6 and 7 cover the mathematics and applications of simple interest. * Compound interest is a system whereby interest is calculated and added to the original principal amount at regular intervals of time. For subsequent periods, interest is calculated on the combination of the original principal and the accumulated (or accrued) interest from previous periods. Compound interest is used mainly (but not exclusively) for loans and investments with durations longer than one year. Chapters 8 and beyond cover the mathematics and applications of compound interest.
The rate of interest is the amount of interest (expressed as a percentage of the principal) charged per period. Simple interest rates are usually calculated and quoted for a one-year period. Such a rate is often called a per annum rate. That is,
Note: If a time interval (such as “per month”) is not indicated for a quoted interest rate, assume the rate is an annual or per annum rate.
The rate of interest charged on a loan is the lender's rate of return on investment. (It seems more natural for us to take the borrower's point of view because we usually become borrowers before we become lenders.)
If you “go with your intuition,” you will probably correctly calculate the amount of simple interest. For example, how much interest will $1000 earn in six months if it earns an 8% rate of interest? Your thinking probably goes as follows: “In