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Fee charged for the use of money

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Simple Interest

Compound Interest

Bank Discount

Types of Interest

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Inability to cope with the rising amount of

interest. Example: Credit card No knowledge on how loans work

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Study how loan payments are constructed

Study the relationship between length of

payment and interest

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= (1 )

=

t =

Grow arithmetically

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RM1000

Simple Interest First Year Second Year

RM1000

RM1000

Assume interest, i = 6%

RM60 RM60

RM1000 RM1060 RM1120

RM60

Bring Forward

The amount is multiplied by interest rate

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= (1 )

=

t =

Growth geometrically

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RM1000

Compound Interest First Year Second Year

RM1000

RM1000

Assume interest, i = 6%

RM60 RM60

RM1000 RM1060 RM1123.60

RM3.60

RM60

Bring Forward

The amount is multiplied by interest rate

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=

(+)

= (1 )

d =

t =

Charged at the beginning

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RM1000

ank Discount First Year Second Year

RM1000

RM1000

Assume interest, i = 6%

(RM56.60)

RM1000 RM943.40 RM886.80

Therefore,

=6%

1 6 %

= .0566

(RM56.60)

(RM56.60)

Bring Forward

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.

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1

t

1 1 = (1 )

A(t)

Compound Interest

Simple Interest

0

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Short term accounts or loans

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THEDISSIMILARITIESBETWEEN SIMPLEINTEREST & COMPOUND INTEREST

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SIMPLE INTEREST COMPOUND INTEREST

Arithmetic growth 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 shortterm investments (term < 1 year)

the interval of period consist of longterm investments( term > 1 year)

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THE DISSIMILARITIES BETWEEN SIMPLE

INTEREST & BANK DISCOUNT

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SIMPLE INTEREST BANK DISCOUNT

DISSIMILARITIES

Interest is paid on the date of due (at

the end of each period) using interestrate(i)

Interest is paid on the date of issue(at

the beginning of each period) usingdiscount rate (d)

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Recommendation 1all payments

made on time

All payments be made

promptly

Pays more

Recommendation 2to study the type

of loan to be taken

Look up the type of

loan

Recommendation 3to finance loan

with lower term of

payment

The lower the term

the lower the interest