This chapter covers principles of finance. After completing this chapter students should be able to: solve financial problems that involve simple interest; solve problems involving compound interest; find the future value of an annuity; find the amount of payments to a sinking fund; find the present value of an annuity; and find an installment payment on a loan.
Chapter overview
In this chapter, you will learn to:
Solve financial problems that involve simple interest.
Solve problems involving compound interest.
Find the future value of an annuity, and the amount of payments to a sinking fund.
Find the present value of an annuity, and an installment payment on a loan.
Simple interest and discount
Section overview
In this section, you will learn to:
Find simple interest.
Find present value.
Find discounts and proceeds.
Simple interest
It costs to borrow money. The rent one pays for the use of money is called the
interest . The amount of money that is being borrowed or loaned is called the
principal or
present value . Simple interest is paid only on the original amount borrowed. When the money is loaned out, the person who borrows the money generally pays a fixed rate of interest on the principal for the time period he keeps the money. Although the interest rate is often specified for a year, it may be specified for a week, a month, or a quarter, etc. The credit card companies often list their charges as monthly rates, sometimes it is as high as 1.5% a month.
Simple interest
If an amount
is borrowed for a time
at an interest rate of
per time period, then the simple interest is given by
The total amount
also called the accumulated value or the future value is given by
A Visa credit card company charges a 1.5% finance charge each month on the unpaid balance. If Martha owes $2350 and has not paid her bill for three months, how much does she owe?
Before we attempt the problem, the reader should note that in this problem the rate of finance charge is given per month and not per year.
The total amount Martha owes is the previous unpaid balance plus the finance charge.
Once again, we can compute the amount directly by using the formula
