Review

Vocabulary
• Interest (I) - is the payment for the use of someone’s money for a specified
length of time. This payment depends on the principal, the rate and the time .
Two Types of Interest
1. Simple - is calculated on the principal, or original, amount of a loan
2. Compound - is calculated on the principal amount and also on the accumulated
interest of previous periods, and can thus be regarded as "interest on
interest.
•
 Vocabulary
• Principal (P) - is the money loaned or invested.
• Rate (r) - is the percent of the principal paid for the use of the money.
• Time or term (t) - is the length of time over which the principal is used,
expressed in year/s.
• Future Value or Maturity Value (F) – is the sum of the principal and
interest.
• Lendor/Investor - is the one who lend or invest money.
• Borrower – is the one who borrows money.
 Formulas
• Simple Interest:

• Future Value:
Example 1:
Principal Rate Term Interest Future Value
P 5 000 5% or 0.05 1 year

Solution:
I F=P+I
I F = P5000 + P250
I F = P5250
Example 2:
Principal Rate Term Interest Future Value
P 10 000 2 years P 2 000

Solution:
r = I/Pt F=P+I
r = P2000/(P10000x2) F = P10000 + P2000
r = P2000/P20000 F = P12000
r = 0.1 or 10%
Example 3:
Principal Rate Term Interest Future Value
P 15 000 8% or .08 P 600

Solution:
t = I/Pr F=P+I
t= P600/(P15000x.08) F = P15000 + P600
t= P600/P1200 F = P15600
t =0.5 years
Example 4:
Principal Rate Term Interest Future Value
7% or .07 3 years P 4200

Solution:
P = I/rt F=P+I
P= P4200/(.07x3) F = P20000 + P4200
P= P4200/.21 F = P24200
P=P20000
Example 5:

Sarah deposits P 4 000 at a bank at an interest rate of 4.5% per year. How much interest
will she earn at the end of 3 years?

Solution:
I = Prt F=P+I
I= P4000x.045x3 F = P4000 + P540
I= P540 F = P4540
COMPOUND INTEREST
 Compound Interest
- is calculated on the principal amount and also on the
accumulated interest of previous periods, and can thus be
regarded as "interest on interest”.
•
Number of Compounding
Annually 1
Semi-Annually 2
Quarterly 4
Monthly 12
Weekly 52
Daily 365
Hourly 8760
 Formula
Future Value
𝑛𝑡
𝑟
𝐹 = 𝑃 (1 + )
𝑛
Compound Interest
 Given that P10, 000 is the principal amount, 10% is the interest rate and 2 years is the
term the money will be borrowed. Find the future value and the compound interest if
the money is compounded annually.
Future Value
𝑛𝑡
Compound Interest
𝑟
𝐹 = 𝑃 (1 + )
𝑛 1(2)
.1
𝐹 =10000(1+ )
1
 Given that P10, 000 is the principal amount, 10% is the interest rate and 2 years is the
term the money will be borrowed. Find the future value and the compound interest if
the money is compounded semi-annually.
Future Value Compound Interest
𝑛𝑡
𝑟
𝐹 = 𝑃 (1 + )
𝑛 .1 2( 2)
𝐼 𝑐= 𝐹 − 𝑃
𝐹 =10,000 (1+ ) 𝐼 𝑐 =12 ,155.06 −10 , 000
2
𝐹 =10,000 (1+0.05 ) 4 𝐼 𝑐 =2 , 155.06
4
𝐹 =10,000 (1.05 )
𝐹 =10,000 (1.21550625 )
𝐹 =12,155.06