1. Interest

2. What is interest?
Interest is what you can earn when you let people borrow money
Interest is also the cost you have to pay when you borrow money
Some call it the price of borrowing money

3. example
If I borrow $1000 from you for a year at 10% interest, then at the end of that year I will have to pay you the original $1000 plus $100 in interest.
If you put $1000 in the bank for one year and the bank pays 2% interest, then at the end of that year, you will have the original $1000 plus $20 in interest.

4. How banks make their money
Banks and financial institutions make their money by charging higher interest rates on loans than they do on deposits. This is called the spread.
Example: If you deposit $1000 in a savings account, the bank will pay you 2% interest ($20). If someone borrows $1000, they will be charged 7% interest ($70). The bank will make a profit of $50 ($20 - $70) per year on the $1000 deposit.

5. Simple v. Compound Interest
Simple interest is interest paid on the original principal only.
Compound interest is interest paid on the original principal, plus the interest earned previously.
Simple interest grows slow, compounding speeds up the process

6. Example
After
Simple Interest
Compound Interest
1 year
110
2 years
120
121
3 years
130
133
4 years
140
146
5 years
150
161
10 years
200
259
20 years
300
672
30 years
400
1,744
40 years
500
4,526
50 years
600
11,739
You begin with $100. In each case the money is invested at 10% annual interest. In the two columns your total dollar balance is given.

7. Fixed v/s variable interest
Fixed interest rates stay the same for the life of the loan. Ex: 30 yr fixed rate mortgage Variable interest rates change every year. They generally start off with a very low rate and increase over time. Ex: 4/1 Variable interest rate – fixed for the first 4 years, then increases every year (annually) thereafter

8. Questions???