ES18-Simple & Compound Interests

Time Value of Money

The concept that the value of money changes over time due to factors such as interest rates and time periods.

Economic Equivalence

The combination of interest rate and time value of money to determine different amounts of money at different points in time that are equal in economic value.

Simple Interest

A payment for the use of money or income on an investment, computed on the original principal for the duration of the transaction.

Principal

The present value or initial amount of money in a financial transaction.

Interest Rate

The percentage rate at which interest is charged or earned on a financial transaction.

Interest Rate

The percentage rate at which interest is charged or earned on a financial transaction.

Cash Flow Diagram

A visual representation of the flow of money in a financial transaction, indicating the amount of interest needed to make different amounts equivalent.

Debt

The amount of money borrowed and owed to a lender.

Accumulated Value

The final amount of money in a financial transaction, including the principal and interest.

Exact Time

The time between two dates counted with the exact number of days in a year, typically 365 days.

Exact Time

The time between two dates counted with the exact number of days in a year, typically 365 days.

Simple Interest

Interest calculated on the principal amount for a specific period of time at a fixed interest rate.

Approximate Time

An estimated number of days used to calculate interest.

Banker's Rule

Ordinary interest, exact time is known as the _______ and is applied when the type of interest is not specified.

Problem 1

A specific example of calculating ordinary interest using the 6% method.