Lesson 7: Interest Flashcards
the excess of resources (usually cash) received or paid over the amount
of resources loaned or borrowed which is called the principal.
interest
the amount
of resources loaned or borrowed
principal
the product of the principal amount multiplied by the period’s
interest rate (a one-year rate in standard).
simple interest
what is cumulative interest
add all the interest from the previous years
the interest paid on both the principal and the amount of
interest accumulated in prior periods.
compound interest
formula for simple interest
I = P x r x T
formula for compound interest
I = P (1+r)ᵀ
formula for the future value
FV = PV (1+i)ⁿ
PV = present value, FV = future value, n = time, i = interest rate
formula for the present value
PV = FV / (1+i)ⁿ
PV = present value, FV = future value, n = time, i = interest rate
formula for effective interest rate
r = (1+i/n)ⁿ - 1
n = no. of periods, i = interest rate, r = effective interest rate
the amount you have to invest today if you want to have a certain amount of cash low in the future
present value
the amount to which an investment will grow after earning interest
future value
it is the real return on a savings account or any interest-paying investment when the effects of compounding over time are taken into account
effective annual rate
effective annual rate (EAR) is also known as
effective interest rate, effective rate, or annual effective rate (AER)
it is the interest on a loan or deposit calculated based on both the initial principle and the accumulated interest from previous periods
compounded interest
