COMPUTING INTEREST
Simple Interest is interest paid only on the principal of a loan. No interest is paid on interest accrued during the term of the loan.
Practice Exercise:
Amount of loan is $150 at 4% annual simple interest,
a) If the loan is paid in 1 year,
What is the simple interest?
How much is total due?
b) If the loan is paid in 90 days (3 months),
What is the simple interest?
How much is total due?
c) If the loan is paid in 18 months,
What is the simple interest?
How much is total due?
A man paid $28,500 on a loan of $25,000 he made 4 years ago. What is the interest rate (not compounded) charged on the loan?
Compound Interest is interest which is calculated not only on the initial principal but also the accumulated interest of prior periods.
Practice Exercise:
Consider Principal of $2500, Annual rate of 8%, in 5 years. Find value after 5 years if:
a) Compounded annually
b) Compounded quarterly
c) Compounded monthly
Burger Queen will need $50,000 in 5 years for expansion of business. To meet this goal, the company deposits money in an account today that pays 9% annual interest compounded quarterly. Find the amount that should be invested to total $50,000 in 5 years.
