3.1 Simple Interest Flashcards
What is “The Principal” and what symbol do we use to denote it?
If you deposit a sum of money P in a savings account or if you borrow a sum of money P from a lender, then P is referred to as the principal.
What is interest?
When money is borrowed—whether it is a savings institution borrowing from you when you deposit money in your account, or you borrowing from a lender—a fee is charged for the money borrowed. This fee is rent paid for the use of another’s money, just as rent is paid for the use of another’s house. The fee is called interest.
What is the interest rate?
It is usually computed as a percentage (called the inter-est rate) of the principal over a given period of time.
What is a simple interest rate and what is its formula?
The interest rate, unless otherwise stated, is an annual rate.
Simple interest is given by the following formula:
Since P is the amount that is borrowed now and A is the amount that must be paid back in the future, P is often referred to as the present value and A as the future
value. The formula relating A and P follows:
What is a bankers year and how many days is it?
Because simple interest is used on short-term notes, the time period is often given in days rather than months or years. How should a time period given in days be con-verted to years? In this section, we will divide by 360, assuming a 360-day year called a banker’s year.
What is the average daily balance method?
A common method for calculating the interest owed
on a credit card is the average daily balance method. In this method, a balance is cal-culated at the end of each day, incorporating any purchases, credits, or payments that
were made that day
