SIMPLE AND COMPOUND INTEREST and SIMPLE DISCOUNT

Simple Interest

used for short borrowings such as obtained for less than one year

Principal

Refers to the amount borrowed, deposited or interested

Rate of Interest

Refers to the percentage of the principal per year.

Time

Refers to the length of time or period from the date the loan is made to the date the loan becomes due or payable.

Approximate time

assumes that each of the 12 months in a year has 30 days

Actual time

counts the exact number of days, hence, a year is taken as composed of 365 days

Ordinary interest

one year is taken as 360 days

Exact interest

365 days in a year

Maturity Value

The amount of interest generated in terms of year is based only on the starting amount or

principal amount.

Principal or Face Value

The amount or proceeds received by the borrower from the lender

Bank Discount/Simple Discount

Interest deducted in advance from the face value

Compound Interest

refers to the interest calculated on the initial principal, which also includes all the accumulated interest from previous periods