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GROUP NAME: Stallionz

Leader name: Saleh Rehman 1138

Members name: Ali Raza 1174

Sidra Ubaid 1112

Sehrish Saeed 1106

Awais Khan 1176

Hadiqa Shah 1136

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Interest is the price paid by the borrower to thelender for the use of borrowed funds during acertain period.

OR

Interest is the cost of borrowing money. An

interest rate is the cost stated as a percent of theamount borrowed per period of time, usuallyone year.

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There are two types of interest.

SIMPLE INTEREST

COMPOUND INTEREST

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Definition:simple interest is interest paid on the original principal only.

ForExample:4000 dollars is deposited into a bank account and the annual interest rate is 8%.

How much is the interest after 4 years?

Use the following simple interest formula:

I = pr t

where pis the principal or money deposited, ris the rate of interest, tis time

We get:

I = pr t

I = 40008% 4

I = 40000.08 4I = 1280 dollars

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Definition:Compound interest is the interest earned notonly on the original principal, but also on allinterests earned previously.

In other words, at the end of each year, the

interest earned is added to the original amountand the money is reinvested.

l

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For Example:Interest at the end of the first year:I = 4000 0.08 1I = 320 dollars

Your new principal per say is now 4000 + 320 = 4320Interest at the end of the second year:I = 4320 0.08 1I = 345.6 dollars

Your new principal is now 4320 + 345.6 = 4665.6Interest at the end of the third year:

I = 4665.6 0.08 1I = 373.248 dollars

Your new principal is now 4665.6 + 373.248 = 5038.848

Interest at the end of the fourth year:I = 5038.848 0.08 1

I = 403.10784 dollarsYour new principal is now 5038.848 + 403.10784 = 5441.95584

Total interest earned = 5441.95584 4000 = 1441.95584The difference in money between compound interest and simple interestis 1441.96 - 1280 = 161.96

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Generating Profits

Interest opens doors to sources of profits for a company. For example,

businesses can please investors by earning them higher profits than expected.Financial managers are expected to give dividends to investors. If these

dividends are accumulated, or more precisely compounded, and reinvested inthe business, higher dividends may be payable the next year.

Ensuring Pension PaymentsVarious companies seek assistance of investment accounts to pay pensions.Typically, employers exclude a fixed amount of their employeessalaries and

contribute it to their pension fund. The amount accumulates for years until theemployees reach retirement age, when the entire amount is provided aspension. Businesses use the money in pension funds to invest in financialinstruments that pay guaranteed return rates. This helps to generate a smoothcycle of pension payments, while earning consistent returns on the investmentsaved for so many years.

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Benefit or Liability ?

Is dependent on your financial perspective. If you are a borrower, compound

interest calculations translate to growth in the amount you owe and the lender

reaps the benefit. If you are the investor, you reap the benefit as your moneygrows The idea of compound interest is appealing only when you are on theearning side of the financial balance. Banks typically pay compoundedinterest on deposits, a benefit for depositors.

Cash ReserveBusinesses utilizing compound interest to grow a general cash reservemay need this money to pay for regular business expenses. Somecompanies, like insurance companies, require a general account or cashreserve as a legal requirement to pay for claims on insurance contracts.The compound interest reduces the need to collect additional premium

from policyholders. For other businesses, it reduces the need to earnmoney from normal business activities

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Q: A student purchases a computer by obtaining a simple interest loan. The computer costs$1500, and the interest rate on the loan is 12%. If the loan is to be paid back in weeklyinstallments over 2 years, calculate:

1. The amount of interest paid over the 2 years, 2. the total amount to be paid back, 3. the weekly payment amount.

SOL: Given: principal: 'P' = $1500, interestrate: 'R' = 12% = 0.12, repayment time: 'T' = 2

years Part 1: Find the amount of interestpaid. interest: 'I' = PRT = 1500 0.12 2 = $360 Part 2: Find the total amount to be paid back. total repayments = principal + interest = $1500 + $360 = $1860 Part 3: Calculate the weekly payment amount total repayments weekly payment amount = --------------------------------------- loan period, T, in weeks $1860 = -------------------

2 52 = $17.88 per week

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