Interest illustration

Interest illustration - amount is $1000 and the interest...

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Interest illustration: The farmer may approach a banker for a loan of $1000 with a promise to return $1100 after a year. In this case the farmer pays an interest of $100 which is 10 percent of the loan but in monetary units. It is easier and more convenient to compute and charge interest in the form of money. This is because loan transactions are carried out over a long number of years in which case, the compound interest to be charged also increases in value. As in the example above, if a bank lends an amount of $1000 at 10% rate of interest after one year the total amount repayable will be $1100 of which the capital or principal
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Unformatted text preview: amount is $1000 and the interest amounts to $100. Further if we suppose the loan is extended over the second year the amount to be repaid will be more than $1200 because at the end of the first year $1100 were repayable and hence have been renewed as loan for the second year. 10% of 1100 will be equal to $110. Therefore at the end of the second year, the borrower would have to repay $1210. 1000 (principal) + 100 (first year’s interest) + 110 (second year’s interest) = 1210...
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