(3-3) Interest: is payment from a borrower or deposit-taking financial institution to a lender or

depositor of an amount above repayment of the principal sum

For example, a customer would usually pay interest to borrow from a bank, so they pay the bank
an amount which is more than the amount they borrowed; or a customer may earn interest on their
savings, and so they may withdraw more than they originally deposited. In the case of savings, the
customer is the lender, and the bank plays the role of the borrower.

Interest: It’s the amount of increase added to the original borrowed or invested amount of
money.

Interest(I) = total accumulative amount – original amount

Interest rate: Is the amount of interest earned by a unit time of a unit of principal. (usually
expressed as a percentage).

Interest rate = (Interest occurred per unit time)/ (original amount) * %

Example:

A company borrowed 100000$ before one year and now repaid 110000 $. compute the interest
and interest rate.

Sol.

Interest =110000 – 100000 = 10000$

Interest rate = 10000/100000 * 100 = %10

(3-3-1) Interest type:

1-Simple interest: is calculated only on the principal amount, or on that portion of the principal
amount that remains.

Simple interest is seldom used in today’s economics. Thus, if you were to loan a present sum of
money P to someone at a simple annual interest rate i for a period of n years, the amount of interest
you would receive from the loan would be:

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Engineering economics Shang Asmat Mohammed
Total Interest = Principal (P) × Number of periods (n) × Interest rate (i) = P × n × i

At the end of n years the amount of money due F would equal the amount of the loan P plus the
total interest earned. F = P + P × n × i = P (1 + i × n)

Example:

If you borrowed 1000 $ at 6 % interest per year. Find the amount for each year, and find the total
amount at the end of 3 years? List the table of calculation?

Sol:

1000
n=3
i=6%

0 1 2

F=?

I=pni 1000 * 3 * 0.06 = 180 $

F=p+pni F = 1000 + 180 = 1180 $

Borrowed
Yrs. Interest Owned money
money

0 1000 ----- 1000

1 ----- 1000 * 0.06= 60 1060

2 ----- 1000 * 0.06= 60 1120

3 ----- 1000 * 0.06= 60 1180

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Engineering economics Shang Asmat Mohammed
2- Compound interest: is calculated using the principal plus the total amount of interest
accumulated in previous periods. Thus, compound interest means “interest on top of interest”
Therefore, if an amount of money P is invested at some time t = 0, the total amount ofmoney (F)
that would be accumulated after one year would be:

0 1

F1 = P + Pi 2 3 4 5

F1 = P(1 + i)
P F1
Where F1 = the total amount accumulated after one year

At the end of the second year, the total amount of money accumulated (F2) would be

equal to the total amount that had accumulated after year 1 plus interest from the end of

year 1 to the end of year 2.

1 2
F2 = F1 + F1 i 0
3 4 5
F2 = P(1 + i) + P(1 + i)i
F1 F2
F2= p (1 + i+ i+ i2)
F2 = P(1 + i) 2

Similarly, the total amount of money accumulated at the end of year 3 (F3) would be

equal to the total amount that had accumulated after year 2 plus interest from the end of

year 2 to the end of year 3.

F3 = F2 + F2 i

F3 = P(1 + i) 2 + P(1 + i) 2 i

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Engineering economics Shang Asmat Mohammed
 2 3

F3 = P(1+ i) 2 (1 + i) 0
1 4 5

F3 = P(1 + i) 3
F2 F3
Find for n years:

F = p (1 + i)n single compound factor .

𝐅
P= present worth factor.
(𝟏+𝐢)𝐧

Example:
If you borrowed 1000 $ at 6 % compound interest per year. Find the amount for each year, and
find the total amount at the end of 3 years? List the table of calculation?

Sol:
1000 n=3
i=6%

0 1 2

F=?
In case of simple interest:
I=pni 1000 * 3 * 0.06 = 180 $
F=p+pni F = 1000 + 180 = 1180 $
For compound interest

F = p (1+i) n
F = 1000 (1 + 0.06)3 = 1191. 02
Borrowed
Yrs. Interest Owned money
money

0 1000 ----- 1000

1 ----- 1000 * 1 * 0.06 = 60 1060

2 ----- 1060 * 1 * 0.06 = 63.6 1123.6

3 ----- 1123.6* 1* 0.06 = 67.38 1191.02

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Engineering economics Shang Asmat Mohammed