Simple Interest and Compound Interest Flashcards
an amount paid for barrowed capital.
Interest
Defined as the interest on a loan or principal that is based only on the original amount of the loan or the principal money being barrowed.
Simple Interest
- is based on banker’s year
- composed of 12 months, 30 days which is equivalent to 360 days in one year.
Ordinary Simple Interest
- based on the exact no. of days/dates of the calendar year
- 365 ordinary years
- 366 leap year
Exact Simple Interest
is the interest paid in advance.
Discount
- is the accumulation of interest from the previous periods. It means that there is an interest over the previous interest (accumulated interest) and the initial principal.
Compound interest
the interest is compounded at the end of each finite-length period, such as a month, a quarter, or a year.
Discrete compounding
it is assumed that cash payments occur once per year, but the compounding is continuous throughout the year.
Continuous compounding
An interest on top of interest.
Compound Interest
-A quick estimation of doubling the invested money in an annual rate of compounded return.
-Only works in compound interest
-Earliest concrete context was referenced by Luca Pacioli in 1494 at his book “Summa de Arithmetica”.
Rule of 72
– the amount earned by a unit principal per time.
Rate of Interest
– rate is specified at compounding periods of less than a year
- the _________ specifies the rate of interest and a number of interest periods in one year.
Nominal Rate of interest
– is the actual or exact rate of interest on the principal during a one-year period.
Effective Rate of Interest
is a graphical representation of the cash transactions for a given interest period.
Cash Flow Diagram
An ________ is obtained by setting the sum of the values on a certain comparison or focal date of one set of obligations equal to the sum of the values on the same date of another set of obligations.
Equation of Value
