DISCUSSION:

The simple interest was discussed in our 1st week, this week you will explore the
calculation and analysis of compound interest. In the same manner that you will also
be learning the computation of compound interest when the maturity value or rate or
time is unknown.
In addition these lessons will enable you to make a wise decision in which
compounding interest will benefit you if you are a lender or a barrower.
Main Tasks:
Read about the whole topic using your book manual start with page 144 to 167, that
covers lesson 25: Compound Interest, and lesson 26: Compounding more than once a
year Lesson 27: Finding interest rate and time in compound interest.
Familiarize yourself of the terms that were used specifically in compounding interest
more than once a year on page 151; definition of terms. Take notice of the difference
between nominal rate and rate of interest. Be particular on the rate notation, what
does it mean, their use and their differences.
r = rate,
im = nominal rate
j = annual rate for each conversion period
On page 152, you will find the formula in calculating maturity value, on page 154
formulas for present value, on page 158 finding the number of periods n, for
compound interest and on page 159 for finding interest rate.
For more information please see lecture PowerPoint that comes with this study guide; Compound
interest.ppt

Have you heard of the lending arrangement called “five-six” why do you think a lot of
people barrow money from loan sharks and yet they complain? How do you think
banks earned money? How do you think lending companies compute the “hulugan’
that a barrower must pay monthly? This week, the lesson will enable you to
understand these basic consumer lending schemes.
Interest is the cost of borrowing money, where the borrower pays a fee to the lender for
the loan. The interest, typically expressed as a percentage, can be either simple or
compounded. Simple interest is based on the principal amount of a loan or deposit. In
contrast, compound interest is based on the principal amount and the interest that
accumulates on it in every period. Simple interest is calculated only on the principal
amount of a loan or deposit, so it is easier to determine than compound interest.
Generally, simple interest paid or received over a certain period is a fixed percentage of
the principal amount that was borrowed or lent. While compound interest in
perspective is accrues and is added to the accumulated interest of previous periods; it
includes interest on interest, in other words.
The difference in calculation is as Compound Interest
follows Simple Interest: Ic=P×(1+r)t −P
Is =P×r×n Where:
where: Ic=Compound interest
Is=Simple interest P=Principal amount
P=Principal amount r=Annual interest rate
r=Annual interest rate t=Number of years interest is applied
n=Term of loan, in years

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