GenMath Lesson 1: Simple Interest - Definition of Terms

Lenders and Creditors

• A 'lender' or 'creditor' refers to an individual or institution that provides funds to another party with the expectation of repayment, typically with interest.

Principal (P)

• In simple interest, 'principal (P)' denotes the initial amount of money borrowed or invested before interest is applied.

Maturity Value or Future Value (F)

• 'Maturity value or future value (F)' is the total amount of money to be repaid at the end of an investment or loan period, including both the principal and the interest earned.

Simple Interest (Is)

• 'Simple interest (Is)' represents the interest calculated solely on the principal amount over a specified time period, without compounding.

Repayment Date or Maturity Date

• The 'repayment date or maturity date' is the designated time at which the borrower must repay the principal and interest in full.

Compound Interest (Ic) Computation

• 'Compound interest (Ic)' is calculated using the formula which considers the principal, the interest rate, and the number of compounding periods, leading to interest on previously accrued interest.

Actual vs. Approximate Number of Days

• The 'actual number of days' refers to the precise count of days between two dates, while the 'approximate number of days' often standardizes time for calculations, typically using a 30-day month for convenience.

Exact Interest vs. Ordinary Interest

• 'Exact interest' is computed based on the actual number of days in the period, while 'ordinary interest' uses a 360-day year for calculations, which may yield different interest amounts.

Compound Interest

• 'Compound interest' is the interest on an investment or loan where the interest accrued is reinvested or added to the principal, resulting in interest calculated on a growing principal balance.

Present Value in Compound Interest

• The 'present value' refers to the current worth of a future sum of money or cash flow, discounted at the appropriate interest rate.

Nominal Interest Rate

• The 'nominal interest rate' is the stated annual interest rate without adjusting for inflation or the effects of compounding during the year.

Annuity

• An 'annuity' is a series of equal payments made at regular intervals over a specified period, commonly used for retirement savings or loan repayments.

Simple Annuity vs. General Annuity

• A 'simple annuity' typically refers to ordinary annuities with payments at the end of each period, whereas a 'general annuity' may also include variations in payment schedules or amounts.

Ordinary Annuity

• An 'ordinary annuity' is characterized by payments made at the end of each payment period, as opposed to an annuity due where payments are made at the beginning.

Effective Interest Rate

• The 'effective interest rate' reflects the true annual rate of interest earned or paid, accounting for compounding within the year.

Payment Interval in Annuities

• 'Payment interval' in the context of annuities refers to the frequency at which the payments are made, which can be monthly, quarterly, annually, etc.

Test your understanding of the definition of terms related to simple interest in General Mathematics. Topics include lender, borrower, origin date, repayment date, and time or term.