CHAPTER TEN - Simple Interest

Abstract

This chapter discusses the concept of simple interest. The fee paid for the borrowed money is called interest. The amount of interest charged or paid depends on three variables: (1) the amount borrowed, which is called the principal; (2) the interest rate, which is listed as a percent per year; and (3) the time for which the money is borrowed, which is listed in years or fractions of a year. Simple interest is the interest charged only on the principal. Another type of interest is called compound interest. When a person borrows money, it is customary to sign a document showing a promise to repay the loan, with or without interest, at a specified date; this type of document is called a promissory note. The face value is the principal amount of the note and the bank discount is the interest that is deducted from the face value. The amount that the borrower receives is the proceeds, the time is the period for which the money is borrowed, and the discount rate is the discount expressed as a percent per year.