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Money-Time Relationships

Interest
- It is a manifestation of the time value of money
- The difference between an ending amount of money and
the beginning amount

Interest = Amount Owed Now Original Amount


Interest = Future Value - Present Value
Money-Time Relationships

Interest Rate
Interest paid over a specific time unit expressed in
percentage of the original amount

Interest Rate (%)


= Interest Accrued per time unit X 100
Original Amount

Interest Period = time unit of the rate

Example
An employee at Laserkinetics.com borrows
$10,000 on May 1 and must repay a total of
$10,700 exactly 1 year later. Determine the
interest amount and the interest rate paid.
Solution
Interest = Amount Owed now Original Amount
= $10,700 - $10,000
= $700
Interest Rate = ($700/ $10,000) x 100%
= 7% per year
Equivalence

States that the different sums of money


at different times would be equal in
economic value
Money-Time Relationships

Types of Interests

Simple Interest
Compound Interest
Simple Interest

Interest paid only on the principal of a loan


I = (P)(N)(i)
Where:
P = principal amount lent or borrowed
N = Number of interest periods
i = interest rate per interest period

and the total amount repaid at the end of N years = P + I


Compound Interest

Interest accrued for each interest period

I = Principal to all accrued interest x


interest rate