Section 5.1

Simple and Compound Interest

Businesses operate with borrowed money. When a business needs order inventory or expand, it may borrow the money needed for the expansion. The borrower will be charged interest for the opportunity to use the money. The interest on the loan is typically charged at some percentage of the amount borrowed called the interest rate.

Not only do businesses borrow, but banks may also borrow money from other banks or even individuals. For instance, you may invest money with a bank and receive interest from the bank. Most consumers borrow money regularly using credit cards. If the balance is not paid off when the lending period is through, you must pay interest to the credit card company for the privilege of borrowing the money.

In this section, we’ll examine several type of interest. Simple interest is interest where a fixed amount is paid based on the amount borrowed and the length of time the money is borrowed. In compound interest, interest accumulates according to the amount borrowed over time and any interest that has accumulated during that period of time. Both types of interest are used extensively in business and finance.

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Caution! – The videos use P instead of PV for the present value and A instead of FV for future value.


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