19/07/2022
🚨How to calculate interest continue 👇🏻
⚠️2.2.2 Interest Charged Quarterly, Monthly or Daily
E.g.
Compare the following three scenarios (A, B and C).
A: Mike invests R5,000.00 at 8% interest compounded annually for a period of 5 years.
Since the interest is compounded annually (yearly), we use the interest rate and the
number of periods as they have been given. This means that the r in our formula is
8% and the n is 5.
The calculation looks as follows:
A = P (1 + r)n
A = 5000(1 + 0.08)5
A = R7,346.64
The interest amount:
CI = A – P
CI = 7346,64 – 5000
CI = R2,346.64
B: Mike invests R5,000.00 at 8% interest per annum compounded quarterly for a period
of 5 years. Before we use the formula, we have to adapt the interest rate to the
period it is being compounded in.
1 year = 8%
1 quarter = 2%
1 year has four quarters, so 5 years has 20 quarters
This means that the r in our formula becomes 2% and the n becomes 20.
🧹The calculation looks as follows:
A = P (1 + r)n
A = 5000(1 + 0.02)20
A = R7,429.74
The interest amount:
CI = A – P
CI = 7429,74 – 5000
CI = R2,429.74
C: Mike invests R5,000.00 at 8% interest per annum compounded monthly for a period
of 5 years. Before we use the formula, we have to adapt the interest rate to the
period it is being compounded in.
1 year = 8%
1 month = 0,7%
1 year has twelve months, so 5 years has 60 months
This means that the r in our formula is 0,7% and the n becomes 60.
The calculation looks as follows:
A = P (1 + r)n
A = 5000(1 + 0.007)60
A = R7,598.68
The interest amount:
CI = A – P
CI = 7598,68 – 5000
CI = R2,598.68
ANSWER: This means that option C is the best. Mike is investing not borrowing, so
he would like to have the highest return possible.
3. PRACTICAL EXAMPLES
3.1. BUYING A CAR
When you buy a car, you are required to make financial decisions before the bank
grants you a loan. You must decide if you are going to buy the car cash or whether
you are going to pay it off.Most banks offer the following terms: 12 months, 24
months, 36 months, 48 months or 60 months. (A car is considered to be a medium
term liability, so the bank will not finance it over a period extending five years.)
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