A16 Simple Interest

Question 1

what is simple interest?

Answer 1

interest rate the applies to original investment only

Question 2

whats the difference b/w simple interest and compound interest in terms of how they accumulate?

Answer 2

simple interest- the amount of interest each period is constant

compount interest - effective interest rate (percent of interest) each period is constant

Question 3

what is the accumulation function for simple interest?

Answer 3

a(t) = a(0) * 1+it

Question 4

For less than 1 year, what interest would the borrower prefer vs the lender.

Answer 4

borrower - compound interest

lender- simple interest

Question 5

for more than 1year, what interest would the lender prefer to the borrower?

Answer 5

lender - compound interest

borrower- simple interest

Question 6

how do you find the effective interest rate for simle interest?

Answer 6

i_n = 1/(1+i(n-1))

Question 7

t or f: simple interest can be used for partial years.

Answer 7

true

Question 8

t or f: under simple interest, every cashflow is treated separately with it’s own time 0

Answer 8

true.