MA-105: Module 2 Vocabulary (Simple Interest, Compound Interest, Mortgages, Car Payments)

What is the “n” value for interest compounded daily?

n = 365

(365 days in a year)

What is the “n” value for interest compounded annually?

n = 1

(As in 1 year)

What is the “n” value for interest compounded weekly?

n = 52

(52 weeks in a year)

What is the “n” value for interest compounded monthly?

n = 12

(12 months in a year)

What is the “n” value for interest compounded quarterly?

n = 4

(As in the “four quarters” in a year)

What is the “n” value for interest compounded semi-annually?

n = 2

(As in half a year)

What is an annuity?

A “financial contract” between a customer and insurance company (such as a bank offering an IRA plan)

*Payments are frequent & regularly spaced.

Key phrase: depositing money “at the end of every month”

What is simple interest?

The amount of income loaned only as a start-up or isolated singular amount

Ex.) taking out a loan to start a delivery service

What is compound interest?

The accumulation of funds over an extended period of time

How do you calculate the total amount of a mortgage payment?

Monthly payments (times) 12 (times) number of years

How do you calculate the total amount of interest paid over time?

Total amount of payments - amount of mortgage

Given an annuity (and a “future”/"A” value), how would you calculate the amount of interest earned over time?

Subtract the starting value from the future value of the annuity.

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Example: You would like to have $3500 in four years for a special vacation following graduation by making deposits semiannually in an annuity that pays 5% interest.

Setting up the “PArnt”: P= ? A= 3500 r= 0.05 (5/100) n= 2 (semi-annually) t= 4

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Finding the interest: 3500 - (400.63 × 2 × 4)

• 400.63 = the P value, or amount included in each deposit (found after using annuity formula)