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Being interested in interest

If you had R1 000, you could either keep it in your wallet, or deposit it in a bank account. If it stayed in your wallet, you could spend it any time you wanted. If the bank looked after it for you, then they could spend it, with the plan of making profit from it. The bank usually “pays" you to deposit it into an account, as a way of encouraging you to bank it with them, This payment is like a reward, which provides you with a reason to leave it with the bank for a while, rather than keeping the money in your wallet.

We call this reward "interest".

If you deposit money into a bank account, you are effectively lending money to the bank - and you can expect to receive interest in return. Similarly, if you borrow money from a bank (or from a department store, or a car dealership, for example) then you can expect to have to pay interest on the loan. That is the price of borrowing money.

The concept is simple, yet it is core to the world of finance. Accountants, actuaries and bankers, for example, could spend their entire working career dealing with the effects of interest on financial matters.

In this chapter you will be introduced to the concept of financial mathematics - and given the tools to cope with even advanced concepts and problems.


The concepts in this chapter are simple - we are just looking at the same idea, but from many different angles. The best way to learn from this chapter is to do the examples yourself, as you work your way through. Do not just take our word for it!

Simple interest

Simple Interest

Simple interest is where you earn interest on the initial amount that you invested, but not interest on interest.

As an easy example of simple interest, consider how much you will get by investing R1 000 for 1 year with a bank that pays you 5% simple interest. At the end of the year, you will get an interest of:

Interest = R 1 000 × 5 % = R 1 000 × 5 100 = R 1 000 × 0 , 05 = R 50

So, with an “opening balance" of R1 000 at the start of the year, your “closing balance" at the end of the year will therefore be:

Closing Balance = Opening Balance + Interest = R 1 000 + R 50 = R 1 050

We sometimes call the opening balance in financial calculations the Principal , which is abbreviated as P (R1 000 in the example). The interest rate is usually labelled i (5% in the example), and the interest amount (in Rand terms) is labelled I (R50 in the example).

So we can see that:

I = P × i


Closing Balance = Opening Balance + Interest = P + I = P + ( P × i ) = P ( 1 + i )

This is how you calculate simple interest. It is not a complicated formula, which is just as well because you are going to see a lot of it!

Not just one

You might be wondering to yourself:

  1. how much interest will you be paid if you only leave the money in the account for 3 months, or
  2. what if you leave it there for 3 years?

It is actually quite simple - which is why they call it Simple Interest .

  1. Three months is 1/4 of a year, so you would only get 1/4 of a full year's interest, which is: 1 / 4 × ( P × i ) . The closing balance would therefore be:
    Closing Balance = P + 1 / 4 × ( P × i ) = P ( 1 + ( 1 / 4 ) i )
  2. For 3 years, you would get three years' worth of interest, being: 3 × ( P × i ) . The closing balance at the end of the three year period would be:
    Closing Balance = P + 3 × ( P × i ) = P × ( 1 + ( 3 ) i )

Questions & Answers

can someone help me with some logarithmic and exponential equations.
Jeffrey Reply
sure. what is your question?
okay, so you have 6 raised to the power of 2. what is that part of your answer
I don't understand what the A with approx sign and the boxed x mean
it think it's written 20/(X-6)^2 so it's 20 divided by X-6 squared
I'm not sure why it wrote it the other way
I got X =-6
ok. so take the square root of both sides, now you have plus or minus the square root of 20= x-6
oops. ignore that.
so you not have an equal sign anywhere in the original equation?
Commplementary angles
Idrissa Reply
im all ears I need to learn
right! what he said ⤴⤴⤴
what is a good calculator for all algebra; would a Casio fx 260 work with all algebra equations? please name the cheapest, thanks.
Kevin Reply
a perfect square v²+2v+_
Dearan Reply
kkk nice
Abdirahman Reply
algebra 2 Inequalities:If equation 2 = 0 it is an open set?
Kim Reply
or infinite solutions?
The answer is neither. The function, 2 = 0 cannot exist. Hence, the function is undefined.
Embra Reply
if |A| not equal to 0 and order of A is n prove that adj (adj A = |A|
Nancy Reply
rolling four fair dice and getting an even number an all four dice
ramon Reply
Kristine 2*2*2=8
Bridget Reply
Differences Between Laspeyres and Paasche Indices
Emedobi Reply
No. 7x -4y is simplified from 4x + (3y + 3x) -7y
Mary Reply
is it 3×y ?
Joan Reply
J, combine like terms 7x-4y
Bridget Reply
im not good at math so would this help me
Rachael Reply
I'm not good at math so would you help me
what is the problem that i will help you to self with?
how do you translate this in Algebraic Expressions
linda Reply
Need to simplify the expresin. 3/7 (x+y)-1/7 (x-1)=
Crystal Reply
. After 3 months on a diet, Lisa had lost 12% of her original weight. She lost 21 pounds. What was Lisa's original weight?
Chris Reply
what's the easiest and fastest way to the synthesize AgNP?
Damian Reply
types of nano material
abeetha Reply
I start with an easy one. carbon nanotubes woven into a long filament like a string
many many of nanotubes
what is the k.e before it land
what is the function of carbon nanotubes?
what is nanomaterials​ and their applications of sensors.
Ramkumar Reply
what is nano technology
Sravani Reply
what is system testing?
preparation of nanomaterial
Victor Reply
Yes, Nanotechnology has a very fast field of applications and their is always something new to do with it...
Himanshu Reply
good afternoon madam
what is system testing
what is the application of nanotechnology?
In this morden time nanotechnology used in many field . 1-Electronics-manufacturad IC ,RAM,MRAM,solar panel etc 2-Helth and Medical-Nanomedicine,Drug Dilivery for cancer treatment etc 3- Atomobile -MEMS, Coating on car etc. and may other field for details you can check at Google
anybody can imagine what will be happen after 100 years from now in nano tech world
after 100 year this will be not nanotechnology maybe this technology name will be change . maybe aftet 100 year . we work on electron lable practically about its properties and behaviour by the different instruments
name doesn't matter , whatever it will be change... I'm taking about effect on circumstances of the microscopic world
how hard could it be to apply nanotechnology against viral infections such HIV or Ebola?
silver nanoparticles could handle the job?
not now but maybe in future only AgNP maybe any other nanomaterials
can nanotechnology change the direction of the face of the world
Prasenjit Reply
At high concentrations (>0.01 M), the relation between absorptivity coefficient and absorbance is no longer linear. This is due to the electrostatic interactions between the quantum dots in close proximity. If the concentration of the solution is high, another effect that is seen is the scattering of light from the large number of quantum dots. This assumption only works at low concentrations of the analyte. Presence of stray light.
Ali Reply
the Beer law works very well for dilute solutions but fails for very high concentrations. why?
bamidele Reply
how did you get the value of 2000N.What calculations are needed to arrive at it
Smarajit Reply
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Source:  OpenStax, Siyavula textbooks: grade 10 maths [ncs]. OpenStax CNX. Aug 05, 2011 Download for free at http://cnx.org/content/col11239/1.2
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