In Financial Mathematics 1380 we have covered a variety of topics.

All of the topics we have covered in class have real world applications. However, the topics that will be highlighted in this essay are simple interest and compound interest. In mathematics interest is the return or amount of extra money paid on an investment or loan. If you are the lender you will receive an amount of extra money, aside from the principal, from lending your money. If you are the borrower, interest is the extra amount of money you will pay back that is in addition to the principal amount you have borrowed. The amount of interest a lender receives or a borrower pays is determined by a few factors; such as, time, rate and principal. Also, the amount of interest a person may receive or pay is determined on whether it is simple or compound interest. Simple interest is defined on www.dictionary.com as, interest payable only on the principal; interest that is not compounded. Simple interests formula is interest= principal x rate x time. The principal is the present or initial amount of money that is lent or borrowed. The rate is the percentage of the amount borrowed. The time is the length of the loan or investment. Time can be measured in days, months or years. When using days, there are two methods of calculating time; the exact interest method and the ordinary interest method. When using the exact interest method, the time variable that is plugged into the interest formula is the amount of days the money is lent or borrowed for divided by 365. Given the same scenario, but asked to use the ordinary interest method, the amount of time should be divided by 360. When calculating the time variable using months the amount of time should be divided by 12. EX. Solve for I Facts: Simple interest, two-year loan Yr. 1 I = $100(Principal) x 10%(Rate) x 1 (Time; First Year) Solution: Simple interest for year one = $10.00 Yr. 2 I = $100 (P) x 10%(R) x 1(T) Solution: Simple interest for year two = $10.00 Maturity Value = $120.00 Compound interest is interest paid on both the principal and on accrued interest. (www.dictionary.com) Accrued interest is the interest that has been accumulated but not paid or due. Compound interest can be compounded quarterly (Four times a year), semiannually (two times a year), or annually (Once a year). Compound interest is determined by N and R; N is the number of periods and R is the rate for each period. The N is calculated by multiplying the number of periods (quarterly, semiannually, annually) by the amount of time. The R is the percentage divided by the number of periods (quarterly, semiannually, annually). EX. Solve for I Facts: Compounded annually, two year loan Yr. 1 I= $100(P) x 10%(R) x 1 (N; First Year) Solution: $10 in interest Yr. 2 I= $110(P) x 10%(R) x 1(N; Second Year) Solution: $11 Maturity Value = $121.00

Simple interest and compound interest are both displayed above. The two types of interest are calculated with the principal amount of money, the time or length of the loan or investment, and also the rate that is a percentage. Simple interest and compound interest have many applications in the real world; a few examples may be buying a car, or lending money to the bank in the form of a savings account. It is important to know the difference between the two so that you can make the best decision with your money. If you were a lender, it would be wisest to use compound interest, because your return on your money will be higher than if you were to use simple interest. However, if you are a borrower, it is wisest to use simple interest, so that you will not pay as much interest as you would if you were using compound interest.