1. Simple interest Chapter M5 Learning Objectives
Understand the effect of inflation on interest rate levels
Perform calculations involving simple interest
Manipulate the simple interest formula
Distinguish between, and calculate, flat and effective rates of interest
Estimate the effective rate of interest
© 2002 McGraw-Hill Australia, PPTs t/a Introductory Mathematics & Statistics for Business 4e by John S. Croucher

2. Inflation and interest rates
Inflation is the term used to define continued increases in the general level of prices in the economy. Inflation is also used to define the decline in the purchasing power of money that occurs when the demand for goods and services is greater than the supply of goods and services.
Price levels of goods and services will rise if the supply of money in the economy increases more quickly than the availability of goods and services (economic outputs).
© 2002 McGraw-Hill Australia, PPTs t/a Introductory Mathematics & Statistics for Business 4e by John S. Croucher

3. Inflation
Inflation is usually accompanied by increased interest rates. As price levels increase, investors anticipate the loss in the buying power of their money and require more interest to compensate for the reduced value of their investment when the principal is repaid.
As inflation continues over time the dollar value of our money buys less goods and services. This leads to increasing pressure on interest rates and wage levels.
© 2002 McGraw-Hill Australia, PPTs t/a Introductory Mathematics & Statistics for Business 4e by John S. Croucher

4. Simple interest
The interest calculated is based on the original principal during the entire period at the stated interest rate.
© 2002 McGraw-Hill Australia, PPTs t/a Introductory Mathematics & Statistics for Business 4e by John S. Croucher

5. What is interest? Income received from capital that has been invested.
Money paid for the use of borrowed money.
© 2002 McGraw-Hill Australia, PPTs t/a Introductory Mathematics & Statistics for Business 4e by John S. Croucher

6. Interest received or paid
Depends on three factors:
The amount of money lent or invested
The rate of interest
The duration of the debt or investment
© 2002 McGraw-Hill Australia, PPTs t/a Introductory Mathematics & Statistics for Business 4e by John S. Croucher

7. Calculation of simple interest
Simple interest: I
Maturity or accumulated value: S
Principal invested or borrowed
© 2002 McGraw-Hill Australia, PPTs t/a Introductory Mathematics & Statistics for Business 4e by John S. Croucher

8. Effective interest rate
This is an interest rate that is always based on the original principal, even though the amount of the loan is reducing.
For every flat rate of interest their will be an effective rate. Its approximate value is given by:
Where: E = effective rate
R = flat rate
N = number of repayments
© 2002 McGraw-Hill Australia, PPTs t/a Introductory Mathematics & Statistics for Business 4e by John S. Croucher