Interest Rate

Interest Rate

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Instructor’s Name

                Interest Rate can be taken from various angle depending on the purpose in which the various transactions are done. Interest rate, I would say, is the amount charged by a lender to a borrower for the use of assets expressed as a percentage of the principal. The assets borrowed can range from buildings to cash. An Interest could be inform of a compensation for a lender over the good that is lended incase damages might occur. On the other hand, when it is cash that is given out, the lender could decide to invest the cash instead of just giving them out. The borrower will have to pay back the money with some additional cash (interest). The percentage of this to the principal is what is known as Interest Rate.

                On the other hand Interest rate ca be said to be the amount of interest due per period as a proportion of the amount lent, deposited or borrowed. Also the portion of the amount lent that the lender changes above the borrowed. Interest rate has three major factors that are influencing it. These factors include:

• The currency of the principal sum borrowed or lend
• The probability default of the borrower
• The residual term

Simple Interest formula:

Simple Interest = P (Principal) X R (interest Rate) X N (years)

E.g. – Borrowing $2000 at a 12% annual interest rate for 8 months means that one would owe $160 in interest (2000 X 12/100 X 8/12)

Compound Interest Formula:

Compound Interest = P (principal) X [(1+R (rate) N (months))-1]

E.g. – Borrowing $1000 at a 6% annual interest rate for 8 months mean that one would owe $170.49

                Generally, Interest rate compiles the percentage difference between an initial amount and a final amount that occurs in different business transactions. Interest rates therefore are given by the formula:[pic 1][pic 2]

      Amount (A) – Principal (P)        X 100%

                Principal

References

Itzigdonh J. & Dore-Cabral C. (2010): Sociological Forum. Competing Identities? Concepts in Mathematics. Accounting. Brown University Press.