Simple Interest Simple Interest is the interest paid on the original principle only.

Simpe Interest ignore the time value of money. Simple interest is generally charged on short-term loans. The growth of interest with simple interest calculation is constant. Simple Interst Computed: Year 1 2 3 4 Deposit at Start RM 400 RM 400 RM 400 RM 400 Interest Earned 10% of RM 400 = RM 40 10% of RM 400 = RM 40 10% of RM 400 = RM 40 10% of RM 400 = RM 40 Total Interest = RM 160 Amount RM 440 RM 480 RM 520 RM 560

Compound Interest Compound interest is where the interest earned is added back to the previous principle. Compound interest is generally charged for long-term loans. Time value of money is important (can be compounded quarterly, semi-annually, or annually). The growth of interest with compound interest calculation is exponential because the principal is getting bigger each period. Compound Interest Computed: Year 1 2 3 4 Deposit at Start RM 400 RM 440 RM 484 RM 532.40 Interest Earned 10% of RM 400 = RM 40 10% of RM 440 = RM 44 10% of RM484 = RM 48.40 10% of RM 532.40 = RM 53.20 Total Interest = RM 185.60 Simple interest is an inappropriate way to measure interest that is paid directly into a saving account because it ignores the overall return on investments. The interest is paid only on the account's principal and not on any interest that has been already accrued.Compound interest may be directly charged to savings accounts by banks at different intervals, for example, some savings accounts apply daily interest at monthly, quarterly or annually intervals. The compounded interest that the bank is paying is calculated on the original principal plus all the interest that has been accumulated for that period. Simple payback fails to truly capture the date when a project or its investment costs are recouped because it ignores the time value of money. In this kind of calculation, the time value of money refers to the potential to earn interest in another manner such as a savings account. Simple Amount RM 440 RM 484 RM 532.40 RM 586.60

interest is a disadvantage to savings account as it is used for a shorter duration of time, as example, a period of less than a year, like 40 days or 60 days and this in result does not allow the growth of working money.Compounding amplifies the growth of the working money. The larger the savings and the longer a persons leave it to compound or reinvest, the potential of earnings will be more. It is common to see simple interest applied to transactions accounts such as loan products, mortgages and personal loans and not to savings accounts. A bank account that offers only simple interest, where money can freely and easily be withdrawn at ATM or debit machines from is unlikely, since withdrawing money and immediately depositing it again would be advantageous. Saving accounts discourages withdrawals and are not for daily use as most of them require a minimum balance and will offer incentives if a person stay above it.

(c) Given P = RM 8 000 r = 9 % = 9/100 = 0.09 t = 2 years Y, additional fees by lender = RM 160 Using Formula:

I = Prt + Y
I = ( 8 000 ) ( 0.09 ) ( 2 ) + 160 I = 1 440 + 160 I = 1 600 for 2 years 1 600 2 = RM 800 per year

800 = 0.1 = 10 % rate 8 000

or I = Prt 1 600 = ( 8 000 ) ( r ) ( 2) 1 600 = 16 000 r

r=

1600 16 000

r = 0.1 r = 10 % rate