Interest

Suppose A & B two business man. They are doing

business. When A borrows money from B, then A has
to pay certain amount of money to B for the use of the
money. The amount paid by A is called Interest.
Here borrowed amount is principal

Interest can be divided in two category:
1. Simple interest
2. compound interest





Simple interest
When interest is payable on the principal only, it is
called simple interest.
If I denotes the interest on a principal P at an interest
rate of r per year for n years, then we have
I = Pnr
The accumulated amount A, the sum of the principal
and interest after n years is given by
A = P + I = P + Prn
= P(1 + rn)






Compound Interest
Frequently, interest earned is periodically added to the
principal and thereafter earns interest itself at the
same rate. This is called compound interest.
Formula:
I= P(1+r)
n


Where I= compound interest, P=principal amount
r=rate of interest, n=number of year.
Annuity
An annuity is a series of payment , ordinarily of a fixed
amount payable regularly at equal intervals.

The intervals may be a year, a half year, a month and so
on.
Annuity Certain
(Payments are to be made for
a certain or fixed number of
years)
Annuity Contingent
(Payments are to be made till the
happening of some contingent
event such as the death of a
person, marriage of a girl ete.)
Annuity due
(Where the first payment
falls due at the beginning
of the ist interval, and so
on)
Annuity immediate
(Where the first
payment falls due at the
end of the first interval,
and so on)
Annuity
Different types of
annuities
Calculation of different types of annuities:

1. Formula for the present value of an Annuity
due

( )
( )
years of Number
interest of Rate
Annuity
due Annuity an of value Present
where
=
=
=
=
)
`

+
+
+ =
n
i
A
V
i
i
i
i
A
V
n
,
1
1
1 1
2. Formula for the present value of an Immediate Annuity
( )
(

+
=
n
i
i
A
V
1
1
1
3. Formula for the amount of an Immediate Annuity
( ) { } 1 1 + =
n
i
i
A
M
4. Formula for the amount of Annuity due
( ) ( ) { } 1 1 1 + + =
n
i i
i
A
M
5. Present Value of an Annuity
The present value of an Annuity is the sum of the present
values of its installments.
Business applicability
A man borrows Tk. 6000 at 6% and promises to pay off the
loan in 20 annual payments beginning at the end of the first
year. What is the annual payment necessary?
( )
(

+
=
n
i
i
A
V
1
1
1
know, We
, where
V = Present value
A = Annuity (annual payment)
i = Rate of interest
n = Number of years
?
20
06 . 0
100
6
000 , 6 ,
=
=
= =
=
A
n
i
V Here
( )
( )
19 . 523
19 . 523
206 . 2
206 . 3 06 . 0 6000
206 . 3
206 . 2
06 . 0
206 . 3
1 206 .. 3
06 . 0
206 . 3
1
1
06 . 0
06 . 1
1
1
06 . 0
06 . 0 1
1
1
06 . 0
6000
20
20
Tk. is necessary payment annual The
=

=
=

=
(

=
(

=
(

+
=
A
A
A
A
A
A
Log (1.06)
20

= 20 log 1.06
=200.0253
=0.506
Antilog 0.506
=3.206
(1.06)
20
=3.206