Introduction and simple interest  (Page 66/2)

Introduction

Should you ever find yourself stuck with a mathematics question on a television quiz show, you will probably wish you had remembered how many even prime numbers there are between 1 and 100 for the sake of R1 000 000. And who does not want to be a millionaire, right?

Welcome to the Grade 10 Finance Chapter, where we apply maths skills to everyday financial situations that you are likely to face both now and along your journey to purchasing your first private jet.

If you master the techniques in this chapter, you will grasp the concept of compound interest , and how it can ruin your fortunes if you have credit card debt, or make you millions if you successfully invest your hard-earned money. You will also understand the effects of fluctuating exchange rates, and its impact on your spending power during your overseas holidays!

Before we begin this chapter it is worth noting that the vast majority of countries use a decimal currency system. This simply means that countries use a currency system that works with powers of ten, for example in South Africa we have 100 (10 squared) cents in a rand. In America there are 100 cents in a dollar. Another way of saying this is that the country has one basic unit of currency and a sub-unit which is a power of 10 of the major unit. This means that, if we ignore the effect of exchange rates, we can essentially substitute rands for dollars or rands for pounds.

Being interested in interest

If you had R1 000, you could either keep it in your wallet, or deposit it in a bank account. If it stayed in your wallet, you could spend it any time you wanted. If the bank looked after it for you, then they could spend it, with the plan of making profit from it. The bank usually “pays" you to deposit it into an account, as a way of encouraging you to bank it with them, This payment is like a reward, which provides you with a reason to leave it with the bank for a while, rather than keeping the money in your wallet.

We call this reward "interest".

If you deposit money into a bank account, you are effectively lending money to the bank - and you can expect to receive interest in return. Similarly, if you borrow money from a bank (or from a department store, or a car dealership, for example) then you can expect to have to pay interest on the loan. That is the price of borrowing money.

The concept is simple, yet it is core to the world of finance. Accountants, actuaries and bankers, for example, could spend their entire working career dealing with the effects of interest on financial matters.

In this chapter you will be introduced to the concept of financial mathematics - and given the tools to cope with even advanced concepts and problems.

The concepts in this chapter are simple - we are just looking at the same idea, but from many different angles. The best way to learn from this chapter is to do the examples yourself, as you work your way through. Do not just take our word for it!

Simple interest

Simple Interest

Simple interest is where you earn interest on the initial amount that you invested, but not interest on interest.