Explanation:
apter 5 – Finance – The first part of this review will explain the different interest and
investment equations you learned in section 5.1 through 5.4 of your textbook and go through
several examples. The second part of this review will give you various sample problems to work
on – you should know how to do all these sample problems for Exam II. The sample exam is
posted to the Math 113 webpage – please come to the Math Resource Center if you need help!
The sum of money you deposit into a savings account or borrow from a bank is called the
principal. The fee to borrow money is called interest. When you borrow money you pay back
the principal and interest to your lender. When you deposit money into a savings account or
other investment, the bank pays you back the principal and the interest earned. Interest is
calculated as a percent of the money borrowed, a percent of the principal. Depending on the type
of loan, interest can be calculated in a variety of ways.
Simple Interest Loans (Section 5.1) :
Simple Interest involves a single payment and the interest computed on the principal only. The
equation for simple interest is a linear function. If the problem refers to a simple interest rate,
then you know you need to use simple interest rate formulas.
Equation #1:
:
Pr
where
I = t
I = the amount of interest paid for borrowing the money
P= the principal or the amount of money you borrowed from the bank
r = is the simple interest rate – this is a per annum rate (i.e. yearly)
t = the amount of time the money is borrowed for – this needs to be in years if the problem gives
you t in months then you need to divide the number of months by 12 to convert t into years.
Equation #2:
A = (P+Prt)=P*(1+rt)
where:
A = the future value - the total amount the borrower owes at the end of the loan period – this is
Principal plus Interest.
I = the amount of interest paid for borrowing the money
P= the principal or the amount of money you borrowed from the bank
r = is the simple interest rate – this is a per annum rate (i.e. yearly)
t = the amount of time the money is borrowed for – this needs to be in years if the problem gives
you t in months then you need to divide the number of months by 12 to convert t into years.
Equation #3:
I = A – P
where:
A = the total amount you owe at the end of the loan period – this is Principal plus Interest.
I = the amount of interest paid for borrowing the money