INTERESTS AND ANNUITY INTERESTS 2 0 INTRODUCTION In

INTERESTS AND ANNUITY INTERESTS

2. 0 INTRODUCTION In today’s business world, the concept of interest as well as annuity is vital to the survival of organizations, establishments and business enterprises. A prudent manager must effectively and efficiently utilize his scarce resources by making best choices in terms of investment and business decisions. The knowledge of interest and annuity is essential for a better understanding of how they work.

WHAT IS AN INTEREST? Interest can be defined as the compensation paid by the borrower to the lender for the use of a certain sum of money. It can also be explained as the rent that a borrower pays to the lender to compensate the lender for his loss of use of the capital while it is loaned to the borrower. The amount invested is known as the PRINCIPAL while the accumulated sum (which includes interest) at the end of the period is known as the AMOUNT. There are two types of interest; simple interest and compound interest

SIMPLE INTEREST The simple interest is a situation where interest only accrues on the original amount invested (principal). In other words the interest is not re-invested. This means the interest is fixed throughout the investment period. This follows the arithmetic progression.

GENERAL FORMULA

EXAMPLE ONE A trader borrowed a sum of N 6000 at 25% interest per annum simple interest. Find the amount that the trader must repay at the end of 6 months period.

SOLUTION

UNKNOWN INITIAL AMOUNT

SOLUTION

INTERVAL

UNKNOWN PERIOD OF INVESTMENT

UNKNOWN INTEREST RATE

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