GenMath Lesson 1: Simple Interest - Definition of Terms
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Questions and Answers

What is the definition of a 'lender' or 'creditor'?

  • A person who borrows money from others
  • A person who receives money from the borrower
  • A person who owes money to others
  • A person who invests money or makes funds available (correct)

    • What does 'principal (P)' refer to in the context of simple interest?

  • The amount of time in years the money is borrowed or invested
  • The amount of money borrowed or invested on the origin date (correct)
  • The annual rate charged by the lender
  • The amount after t years that the lender receives from the borrower

    • What is the 'maturity value or future value (F)' in the context of simple interest?

  • The amount of time in years the money is borrowed or invested
  • The amount paid or earned for the use of money
  • The amount after t years that the lender receives from the borrower on the maturity date (correct)
  • The annual rate charged by the lender

    • What does 'simple interest (𝑰𝒔)' refer to?

    <p>Interest that is computed on the principal and then added to it</p> Signup and view all the answers

    When does the 'repayment date or maturity date' occur?

    <p>On the date when the money borrowed or loan is to be completely repaid</p> Signup and view all the answers

    How is 'compound interest (𝑰𝒄)' computed?

    <p>Interest that is computed from the principal and on the accumulated past interests</p> Signup and view all the answers

    What is the difference between actual number of days and approximate number of days?

    <p>Actual number of days excludes the origin date, while approximate number of days assumes 30 days in each month within the term.</p> Signup and view all the answers

    What is the difference between exact interest and ordinary interest?

    <p>Exact interest is based on a 365-day year, while ordinary interest is based on a 360-day year or the banker’s rule.</p> Signup and view all the answers

    What does compound interest refer to?

    <p>Interest that is computed from the principal and on the accumulated past interests.</p> Signup and view all the answers

    What is the present value in the context of compound interest?

    <p>The amount of money borrowed or invested on the origin date.</p> Signup and view all the answers

    What does nominal interest rate represent?

    <p>The annual rate of interest usually advertised.</p> Signup and view all the answers

    What is meant by the term 'annuity'?

    <p>A sequence of payments made at equal (fixed) intervals or periods of time.</p> Signup and view all the answers

    What distinguishes a simple annuity from a general annuity?

    <p>The payment interval is the same as the interest period for a simple annuity, but not for a general annuity.</p> Signup and view all the answers

    What characterizes an ordinary annuity?

    <p>Payments are made at the end of each payment interval.</p> Signup and view all the answers

    What is meant by 'effective interest rate'?

    <p>The actual rate of interest that takes effect in the loan/investment.</p> Signup and view all the answers

    'Payment interval' in the context of annuities refers to:

    <p>The time between successive payments.</p> Signup and view all the answers

    Study Notes

    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.

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    Description

    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.

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