GROUP NAME: Leader name: Members name:

Stallionz Saleh Rehman Ali Raza 1138 1174

Sidra Ubaid
Sehrish Saeed Awais Khan Hadiqa Shah

1112
1106 1176 1136

Interest is the price paid by the borrower to the lender for the use of borrowed funds during a certain period. OR Interest is the cost of borrowing money. An interest rate is the cost stated as a percent of the amount borrowed per period of time, usually one year.

There are two types of interest.

SIMPLE INTEREST COMPOUND INTEREST

Definition:
simple interest is interest paid on the original principal only.

For Example:
4000 dollars is deposited into a bank account and the annual interest rate is 8%.

How much is the interest after 4 years?

Use the following simple interest formula: I = p r t

where p is the principal or money deposited, r is the rate of interest, t is time

We get: I = p r t I = 4000 8% 4 I = 4000 0.08 4 I = 1280 dollars

Definition:
Compound interest is the interest earned not only on the original principal, but also on all interests earned previously. In other words, at the end of each year, the interest earned is added to the original amount and the money is reinvested.

For Example:

Interest at the end of the first year: I = 4000 0.08 1 I = 320 dollars Your new principal per say is now 4000 + 320 = 4320 Interest at the end of the second year: I = 4320 0.08 1 I = 345.6 dollars Your new principal is now 4320 + 345.6 = 4665.6 Interest at the end of the third year: I = 4665.6 0.08 1 I = 373.248 dollars Your new principal is now 4665.6 + 373.248 = 5038.848 Interest at the end of the fourth year: I = 5038.848 0.08 1 I = 403.10784 dollars Your new principal is now 5038.848 + 403.10784 = 5441.95584 Total interest earned = 5441.95584 4000 = 1441.95584 The difference in money between compound interest and simple interest is 1441.96 - 1280 = 161.96

Generating Profits
Interest opens doors to sources of profits for a company. For example, businesses can please investors by earning them higher profits than expected. Financial managers are expected to give dividends to investors. If these dividends are accumulated, or more precisely compounded, and reinvested in the business, higher dividends may be payable the next year.

Ensuring Pension Payments

Various companies seek assistance of investment accounts to pay pensions. Typically, employers exclude a fixed amount of their employees salaries and contribute it to their pension fund. The amount accumulates for years until the employees reach retirement age, when the entire amount is provided as pension. Businesses use the money in pension funds to invest in financial instruments that pay guaranteed return rates. This helps to generate a smooth cycle of pension payments, while earning consistent returns on the investment saved for so many years.

Benefit or Liability ?
Is dependent on your financial perspective. If you are a borrower, compound interest calculations translate to growth in the amount you owe and the lender reaps the benefit. If you are the investor, you reap the benefit as your money grows The idea of compound interest is appealing only when you are on the earning side of the financial balance. Banks typically pay compounded interest on deposits, a benefit for depositors.

Cash Reserve
Businesses utilizing compound interest to grow a general cash reserve may need this money to pay for regular business expenses. Some companies, like insurance companies, require a general account or cash reserve as a legal requirement to pay for claims on insurance contracts. The compound interest reduces the need to collect additional premium from policyholders. For other businesses, it reduces the need to earn money from normal business activities

Q: A student purchases a computer by obtaining a simple interest loan. The computer costs $1500, and the interest rate on the loan is 12%. If the loan is to be paid back in weekly installments over 2 years, calculate: 1. The amount of interest paid over the 2 years, 2. the total amount to be paid back, 3. the weekly payment amount. SOL: Given: principal: 'P' = $1500, interest rate: 'R' = 12% = 0.12, repayment time: 'T' = 2 years Part 1: Find the amount of interest paid. interest: 'I' = PRT = 1500 0.12 2 = $360 Part 2: Find the total amount to be paid back. total repayments = principal + interest = $1500 + $360 = $1860 Part 3: Calculate the weekly payment amount total repayments weekly payment amount = --------------------------------------loan period, T, in weeks $1860 = ------------------2 52 = $17.88 per week