Engineering Economics: Simple and Compound Interest

Vocabulary flashcards covering core terms, interest types, factors, and formulas from Lecture 2.

Interest

The amount of money paid for the use of borrowed capital or the income produced by money which have been loaned.

Interest Rate

A rate used to calculate interest, typically expressed as an annual percentage rate.

Simple Interest

Interest that is calculated using the principal only, ignoring any interest that had been accumulated in preceding periods.

Principal

The original amount of money borrowed or invested, which serves as the basis for interest and returns.

Ordinary Simple Interest

Simple interest computed on the basis of 12 months of 30 days each, or 360 days in a year.

Exact Simple Interest

Simple interest based on the exact number of days in a year, using 365 days for an ordinary year and 366 days for a leap year.

Compound Interest

Interest calculated for an interest period on the principal plus the total amount of interest accumulated in previous periods, meaning 'interest on top of interest'.

Single Payment Compound Amount Factor

The quantity $(1+i)^n$, designated by the functional symbol $(F/P,i\%,n)$, used to calculate future worth $F$ from present worth $P$.

Single Payment Present Worth Factor

The quantity $(1+i)^{-n}$, designated by the functional symbol $(P/F,i\%,n)$, used to calculate present worth $P$ from future worth $F$.

Nominal Rate of Interest

A rate that specifies the rate of interest and the number of interest periods in one year, where $i = \frac{r}{m}$ ($r$ is the nominal rate and $m$ is the number of compounding periods per year).

Effective Rate of Interest

The actual or exact rate of interest on the principal during one year, calculated as $\text{Effective rate} = (1+i)^m - 1$.