1 / 11

Economics

Economics. Section 4 Dr.Hoda’s part Interest Sheet 5. Interest. Interest ≡ Time value of money. Interest is the fee charged by a lender to a borrower for the use of borrowed money It is usually expressed as an annual percentage of the principal.

serina-dillon
Download Presentation

Economics

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Economics Section 4Dr.Hoda’s part InterestSheet 5 Eng. RedaZein

  2. Interest • Interest ≡ Time value of money. • Interest is the fee charged by a lenderto a borrower for the use of borrowed money • It is usually expressed as an annual percentage of the principal. • Interest per year divided by principalamount, expressed as a percentage. also called interest rate.

  3. Interest types 1- Simple interest: S=P(1+n*i) Where: P: Principal, the starting amount of money S: Future value, sum, resultant, final money , n: number of years (or period ) i: interest rate (it may be annual , every 6 months ,every 3 months, monthly) (note : that (S*n*i) is the increase on the original amount of money)

  4. Interest types 2- Discrete compounding interest: i: interest rate - Also if you have nominal interest rate use the law: Where:r: Nominal interest rate, m: # of interest periods per year N: # of years, m*N: Total number of interest periods

  5. Interesttypes 3- Continuous compounded interest: Where: r: Nominal annual interest rate N: # of years

  6. Interest types • Notes: 1- Most of banks works by discrete interest type (As it has intermediate value). 2- Simple interest is favorable when you borrow money. 3- The continuous compounded is favorable in case of putting money in a bank. 4- In most of our problems we use discrete. 5- If he do not give you which type to use work with simple.

  7. Let’s begin our sheet

  8. 1)An individual borrows $1000 at 12% compounded annually. If the loan is paid pack after 5 years, how much is repaid? (Ans.: S=$1762.34) 2) Person A borrows $4,000 from person B and agrees to pay $1000 plus accrued interest at the end of the first year and $3,000 plus the accrued interest at the end of the fourth year. What are the amounts of the two payments if 8% annual interest applies? (Ans.: S1= $1080, S2=$3720)

  9. 3) Person A wishes to accumulate $1,000 in a saving account 4 years from now and the account pays interest at a rate of 9% compounded annually. How much must be deposited today? (Ans.: P=$708.43) 4) It is desired to have $9,000 available 12 years from now. If $5,000 is available for investment at the present time. What discrete annual rate of compound interest on the investment would be necessary to give the desired amount? (Ans.: i=5.02%)

  10. 5) What will be the total amount available 10 years from now if $2,000 is deposited at the present time with nominal interest at the rate of 6% compound semi-annually? (Ans.: S=$3612.2) 6) For the case of nominal annual interest rate of 20 %, determine: (a) The total amount to which one dollar of initial principle would accumulate after one year with continuous compounding. (b) The effective annual interest rate if compounding is continuous. (Ans.: (a)S=$1.22 (b) ieff=22%)

  11. Any questions? 

More Related