Interest 06

Question 1

1. What is an ANNUAL PERCENTAGE RATE?

Answer 1

The ANNUAL RATE that is charged for borrowing (or made by investing), expressed as a single percentage number that represents the actual yearly costs of funds over the term of the loan.
THIS INCLUDES ANY FEES OR ADDITIONAL COSTS ASSOCIATED WITH THE TRANSACTION.

Question 2

2. What is the benefit of expressing a rate as APR?

Answer 2

Loans can vary in terms of interest rate structure, transaction fees, late penalties, etc.
A STANDARDIZED computation such as the APR provides borrowers with a BOTTOM LINE number that can be easily compared to rates charged by other lenders.

Question 3

3. INTEREST is essentially:

Answer 3

a RENTAL, or LEASING charge to the borrower, for the asset’s use.

Question 4

4. INTEREST is the amount charged for the use of;

Answer 4

ASSETS. Assets borrowed could include CASH, CONSUMER GOODS, LEARGE ASSETS (vehicles, buildings, etc).

Question 5

5. Why is INTEREST charged?

Answer 5

It is charged by LENDERS as compensation for the loss of the asset’s use. In the case of money, the lender could have invested the funds instead of lending them out.

Question 6

6. What is the formula for SIMPLE INTEREST?

Answer 6

SIMPLE INTEREST:

P (principal) x I (annual interest rate) x N (years)

Question 7

7. Borrowing $1,000 at 6% ANNUAL INTEREST RATE for 8 months, you would owe___________in interest:

Answer 7

(1000) (0.06)(8/12) = 40

Question 8

8. What is the formula for COMPOUND INTEREST?

Answer 8

S = P (principal) x (1 + j/m)^mt
where:
S= value after t periods
P = principal amount (initial investment)
j = annual nominal interest rate (not reflecting the compounding)
m = number of times the interest is compounded per year.
t = number of years the money is borrowed for.

Question 9

9. Example of COMPOUND INTEREST.

Answer 9

1,500 is deposited at an annual interest rate of 4.3%, compounded quarterly. The balance after 6 years is:

S = 1500 (1 + (0.043/4))^(4x6) = 1938.84.

The amount of interest received can be calculated by subtracting the principal from this amount.

Question 10

10. Borrowing 1,000 at a 6% annual interest rate using COMPOUND INTEREST for 8 months means that you would owe:

Answer 10

n

Question 11

11. The interest owed when compounding is taken into consideration is higher because:

Answer 11

Interest has been charged monthly on the principal PLUS accused interest from the previous months.

Question 12

12. For very short term loans, the calculation of interest will be similar for SIMPLE INTEREST and COMPOUND INTEREST. This will change when:

Answer 12

the LENDING TIME increases, and the disparity between the two types of lending calculations grows.