Table of Contents
Future Value of Simple Interest
Interest Definition
Interest may be defined as the charge for using the borrowed money. It is an expense for the person who borrows money and income for the person who lends money. This term is commonly used in banks, loans, installments and investments.
Borrower– the person who is receiving the amount and will be paying back the same amount with the interest on the required date or time period.
Lender– the person who is giving the amount which has to be paid on the required date or time period.
Loan– temporary borrowing of money which is to be paid after a certain period of time.
Terms used in Simple Interest
Principal or Sum:– The money that is lent or borrowed.
Interest:– It is the money paid in addition to the principal.
Rate:- It is the percentage of principal paid as interest.
Time:- It is the duration for which the principal is borrowed.
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Simple interest formula:
SI = P x r x t
S.I = Simple interest
P = Principal/Borrowed amount
i/r = rate of interest
n/t = number of periods
Amount or Maturity value: It is the total money paid back at the end of the time period for which it was borrowed. It is given by-
Amount (A) = Principal (P) + Simple Interest (SI)
Compounding:- is determining the future value of present amount.
Future value (FV):- refers to a method of calculating how much the present value (PV) of an asset or cash will be worth at a specific time in the future.
Future value also known as “Terminal Value”
Formula of Future Value:-
FV = Principal + Simple Interest
= P + P x r x t
= P (1 + r x t)
Future value interest factor = (1 + r x t)
Example:-
If you deposit Rs. 2600 in an account paying 20% simple interest for 4 years, find the future value the deposit.
P = Rs. 2,600
r = 20% or = .20
t = 4 years
FV = P (1 + r x t)
= 2,600 (1 + .20 x 4)
= 2,600 (1 + .80)
= 2,600 (1.80)
= Rs. 4,680