Financial Literacy Compound Interest
Introduction
Introduction
Interest is the cost of borrowing money.
Interest is the cost of borrowing money.
When we borrow money from the bank, the bank will charge you money (Interest) for the loan and if we deposit money in a bank, the bank will re-invest the money and give us a share of their profits (Interest). This interest is usually expressed as a percentage of the amount borrowed (Principal).
When we borrow money from the bank, the bank will charge you money (Interest) for the loan and if we deposit money in a bank, the bank will re-invest the money and give us a share of their profits (Interest). This interest is usually expressed as a percentage of the amount borrowed (Principal).
There are two types of interest: (A) Simple Interest & (B) Compound Interest.
There are two types of interest: (A) Simple Interest & (B) Compound Interest.
Simple interest is fixed to the original Principal (P) and independent of the accrued interest. The formula to calculate the total amount of interest & total amount, A, is:
Simple interest is fixed to the original Principal (P) and independent of the accrued interest. The formula to calculate the total amount of interest & total amount, A, is:
I = PRT
I = PRT
A = P + PRT
A = P + PRT
Where R is the interest rate & T is the number of times the interest is applied.
Where R is the interest rate & T is the number of times the interest is applied.
Compound interest is charged against the total amount owed inclusive of accrued interest. The formula to calculate the total amount of interest and total amount, A, is:
Compound interest is charged against the total amount owed inclusive of accrued interest. The formula to calculate the total amount of interest and total amount, A, is:
I = P(1 + R)ᵀ − P
I = P(1 + R)ᵀ − P
A = P(1 + R)ᵀ
A = P(1 + R)ᵀ
Where R is the interest rate & T is the number of times the interest is applied.
Where R is the interest rate & T is the number of times the interest is applied.
Explore it!
Explore it!
Use the applet below to explore how long compound interest takes to double your money!
Use the applet below to explore how long compound interest takes to double your money!
Fun Fact! What determines Interest Rates?
Fun Fact! What determines Interest Rates?
- Opportunity cost of lending the money. Instead of lending the money, how much can I earn by investing this sum of money?
- Expected Inflation. How much less is money worth in the future?
- Risk of default. How likely is the borrower able to pay back the loan?
- Duration. How long is the borrower going to need to repay this loan?
Next: Lets learn about interest rates in real life through a case study of CPF
Next: Lets learn about interest rates in real life through a case study of CPF