Fee charged for the use of money

Simple Interest

Types of Interest

Compound Interest

Bank Discount

• Inability to cope with the rising amount of interest. Example: Credit card • No knowledge on how loans work .

• Study how loan payments are constructed • Study the relationship between length of payment and interest .

• Grow arithmetically • 𝐹𝑢𝑡𝑢𝑟𝑒 𝑉𝑎𝑙𝑢𝑒 = 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒(1 + 𝑖𝑡)  𝑖 = 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒  t = 𝑡𝑒𝑟𝑚 .

i = 6% First Year Second Year RM1000 RM1000 RM60 RM1000 RM60 RM60 RM1000 Bring Forward RM1060 RM1120 The amount is multiplied by interest rate .Simple Interest Assume interest.

• Growth geometrically • 𝐹𝑢𝑡𝑢𝑟𝑒 𝑉𝑎𝑙𝑢𝑒 = 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒(1 + 𝑖) 𝑡  𝑖 = 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑟𝑎𝑡𝑒  t = 𝑡𝑒𝑟𝑚 .

i = 6% First Year Second Year RM1000 RM1000 RM60 RM1000 RM60 RM60 RM3.60 The amount is multiplied by interest rate .Compound Interest Assume interest.60 RM1000 Bring Forward RM1060 RM1123.

• Charged at the beginning • 𝑑 = 𝑖 (1+𝑖) • 𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 = 𝐹𝑢𝑡𝑢𝑟𝑒 𝑉𝑎𝑙𝑢𝑒(1 − 𝑑𝑡)  d = 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑟𝑎𝑡𝑒  t = 𝑡𝑒𝑟𝑚 .

Bank Discount Assume interest.0566 RM1000 RM1000 (RM56.60) RM1000 Bring Forward RM943. First Year Second Year 6% 𝑑 = 1 + 6% 𝑑 = .60) RM1000 (RM56.40 RM886. i = 6% Therefore.60) (RM56.80 The amount is multiplied by discount rate .

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.• Grow your money • Reflect the cost of borrowing • Both total interests in the first period are the same.

A(t) 1 + 𝑖 1 = (1 + 𝑖)1 Simple Interest Compound Interest t 0 1 .

• Short term accounts or loans .

THE DISSIMILARITIES BETWEEN SIMPLE INTEREST & COMPOUND INTEREST .

SIMPLE INTEREST • Arithmetic growth COMPOUND INTEREST • Geometric growth • Interest calculated is based on the initial principal • Interest calculated is based on: Latest principal = previous principal + latest interest • the interval of period consist of long term investments( term > 1 year) • the interval of period consist of short term investments (term < 1 year) .

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THE DISSIMILARITIES BETWEEN SIMPLE INTEREST & BANK DISCOUNT .

SIMPLE INTEREST BANK DISCOUNT DISSIMILARITIES • Interest is paid on the date of due (at • Interest is paid on the date of issue(at the end of each period) using interest the beginning of each period) using rate(i) discount rate (d) .

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Recommendation 1 – all payments made on time • All payments be made promptly • Pays more Recommendation 2 – to study the type of loan to be taken • Look up the type of loan Recommendation 3 – to finance loan with lower term of payment • The lower the term the lower the interest .