MONEY & INTEREST method of paying interest where the interest

MONEY is usually defined as any article or earned on the previous period is added to the

substance used as medium of exchange, means of principal for the succeeding period and earn

payment or measure of wealth. However, when interest too. Hence, in other words, it is the

money is invested in a business or deposited in a interest on the top of interest.

bank, everyone is expecting of an income called the RATE OF INTEREST IS USUALLY EXPRESSED

INTEREST. Hence, interest is the amount of money IN THE FOLLOWING FORM:

paid for the used of borrowed capital or which has 1. NOMINAL RATE OF INTEREST (i)

been loaned. - It is the rate of interest that specifies the

number of interest periods in one year.

SIMPLE INTEREST

It is the interest earned by the principal alone over a METHODS OF COMPOUNDING

given period of time usually counted in number of ANNUALLY ----- 1

days, months or in years. SEMI-ANNUALLY ----- 2

1. ORDINARY SIMPLE INTEREST QUARTERLY ----- 4

360 DAYS / YEAR BI-MONTHLY ----- 6

30 DAYS / MONTH MONTHLY ----- 12

12 MONTHS / YEAR DAILY ----- 365

2. EXACT SIMPLE INTEREST

365 DAYS / YEAR 2. EFFECTIVE RATE OF INTEREST

366 DAYS / LEAP YEAR - It is the actual rate of interest in one

A YEAR WHICH IS EXACTLY year. Effective rate of interest is equal

DIVISIBLE BY (4) IS LEAP YEAR. to the rate of interest if compounded

annually. However, effective rate of

RATE OF INTEREST – Reported in interest is greater than the rate interest

percent per interest period and used in for other method of compounding says,

decimal equivalent in computations. semi-annually, quarterly and etc.

COMPOUND INTEREST – It is the

IMPORTANCE OF EFFECTIVE RATE OF flow (VERTICAL ARROW) which are

INTEREST: drawn in time scale (HORIZONTAL

1. It is the way on how to identify which given NUMBER LINE). This diagram may be

interest rate is higher or better for a drawn according to the following

depositor viewpoints.

2. It is the method used to convert an interest EQUATION OF VALUE (EV)

rate to another method of compounding. - It is the resulting equation when

This is done by equating their effective comparing two sets of obligations at a

rates. certain point of comparison called

3. CONTINUOUS COMPUNDING OF FOCAL DATE.

INTEREST

- If interest is compounded continuously, FOCAL DATE – The equation of value is sum of

it can be noted that the rate of change of cash inflows is equal to sum of cash outflows or at

the principal is equal to the product of the focal date there exists cash flow equilibrium.

the rate of interest compounded

continuously and the principal at any

time.

DISCOUNT

- It is the difference between the future

worth (F) and the present worth (P).

RATE OF DISCOUNT

Commonly discount is not given in terms of its full

amount but in terms of percent called RATE OF

DISCOUNT (d). Rate of discount is the discount on

one-unit negotiable substance in one unit of time.

CASH FLOW DIAGRAM (CFD)

- It is a graphical representation of cash