INTEREST

 Interest is defined as the cost of borrowing money. Interest is commonly calculated using one of
two methods: simple interest calculation, or compound interest calculation.
 Other definitions of interest:
Interest refers to the charge for privileged of borrowing money, typically expressed as an annual
percentage rate.
2. The amount of ownership a stockholder has in a company, usually expressed as percentage

SIMPLE INTEREST

Simple interest is interest paid on the original principal only.

The formula for calculating the simple interest is
Interest = Principal X Interest
Rate X Term of the loan
I = Prt
Where P is the principal amount invested or borrowed
R is the interest rate expressed in decimal
T is the time the money will be borrowed or invested

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In Example 1, the interest rate of 2.5% becomes 0.025 when used in calculation.
2.5 divided by 100 equals 0.025.
Meaning, you should divide first the interest rate by 100 and the quotient will be used in the
computation.

COMPOUND INTEREST
Compound interest is calculated on the principal amount and also on the accumulated interest of
previous periods, and can be regarded as “interest on interest.”

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That is how to compute for compound interest. You need a scientific calculator for this.

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SIMPLE ANNUITIES
It is very common for people to make regular financial transactions at equal intervals of time, for
example, regular deposits into an account or fund. Other examples include regular payments on a loan
or mortgage, monthly house rentals, annual premiums on insurance policies, installment payment when
buying a car or a house, and for senior citizens, monthly retirement benefits. These are called annuities.
An annuity refers to such regular equal deposits/payments made at equal time intervals. It is an
investment tool that allows money to grow and, at the end of the annuity period, will pay a certain
amount of income. The word annuity comes from the medieval Latin word “annuitas,” meaning yearly
or year.
In short, an annuity is a specified amount of money that is paid during specific intervals. An annuity that
is paid at the end of each term is called an ordinary annuity. If the annuity is paid at the beginning of the
term, it is called annuity due.

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Study the example.
A is unknown
R is 5000
R is 0.12/12 means 12% per year or 12 % per 12 months
N is 60 equivalent to 5 years at 12 months each year
In example 1, the problem tells us that in order for Miller to receive P5000 each month for 5 years after
his retirement, he has to invest P224,775.19.
And that is at 12% interest rate. Computing how much he will receive all in all at P5000 each month in 5
years, is 5000 times 60 months equals 300000.

AMORTIZATIONS
When someone is making equal payments whether on a monthly, quarterly, or yearly basis, for home or
car loans, then he or she is dealing with amortization. AMORTIZATION is paying off a debt or loan over
time in equal installments. The payment the person makes goes to the interests and part of the loan
principal. As time goes on, the bigger part of the payments made goes to the principal and less on the
interests.

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In amortization, let us say you have a loan of P200,000 from a bank that imposes 12% interest annually
and the amortization is paid monthly, you need to pay 1% interest for the first month, since 12%/12 is
1%.
Then you are also going to pay part of the principal that would yield to equal amortization per month.
On the second month, the interest that you are going to pay is not anymore 1% of 200,000 but 1% of
(200,000 minus the part of the principal paid in the first month) kaya nga as time goes by lesser na an
interest then the part of the principal you are paying is increasing.

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en

SINKING FUNDS

Sinking funds are used to pay for large expenses that are planned, for example, to pay for home repairs,
save for a new car, pay for a vacation, or to cover large medical bills. This is done by setting the money
aside before using it.

Sinking funds are deposited in a bank at equal amount monthly, quarterly or yearly so that it will yield an
interest.

If you are just using piggy bank to save for a big expense in the future, it shall not earn interest.Pero an
iya purpose pareho hit kanan sinking fund.

INSTALLMENT BUYING AND CREDIT CARDS

Installment buying is a system for paying for goods, products, or services in fixed amounts at specified
intervals usually on a monthly basis.

Many goods and products are too expensive that people could not pay for them on a cash basis, hence,
they opt for installment plans. Installment plans allow people to buy goods over an extended period of
time, without having to put down much money at the time of purchase.

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Credit cards offer people a line of credit (pre-set amount) that can be used to make purchases, balance
transfers, and/or cash advances and require that holders pay back the used amount in the future.

Credit card holders need to make at least the minimum payment every month on the specifies due date.
If the full balance for purchases is not paid off, interest charges will be applied from the date of the
transaction for balance transfers and/or cash advances. Interest rates vary according to the company
that issues the credit card.

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MONEY MARKETS

A money market account is just a type of savings account with some minor variations. Its interest rate is
generally higher than the basic savings rate and it varies from bank to bank. It usually requires a higher
minimum balance.

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