**TIP**: **Simple interest** is computed on the principal amount only. It is the return on the principal for one period. Simple interest is usually expressed as:

I(interest) = P(principal) × R(rate) × T(time)

**TIP**: **Compound interest** is computed on the principal and any interest earned that has not been paid or received. It is the return on the principal for two or more periods. Compound interest uses the accumulated balance (principal plus interest to date) at the end of each period to compute interest in the following period.

**TIP**: The **present value** of a single amount is the current worth of a future amount. **Future value** of a single amount is the future value of an amount to be put on deposit today (a present value figure).

**TIP**: The present value of a single amount is based on three variables: (1) the dollar amount to be received (future value), (2) the length of time until the amount is received (number of periods), and (3) the interest rate (the discount rate). The process of determining the present value is referred to as discounting the future value (i.e. future amount). The relationship of these fundamental variables is depicted in the following diagram.

Unless otherwise indicated, an interest rate is stated on an annual basis. To convert an annual interest rate into a compounding period interest rate, divide the annual rate by the number of compounding periods ...

Start Free Trial

No credit card required