Simple Interest and Its Applications
If you have a lot of surplus cash, it would hardly make sense to hide it under your mattress or bury it in the backyard of your townhouse. Money has the potential to earn money. As any investment specialist will tell you, you want your money to work for you instead of just sitting idle. So you can invest your money and be rewarded by earning interest.
When you take out a loan, you pay interest to the person, bank, or credit union that loaned you the money. The interest that you pay on the loan is the charge or fee for using someone else’s money. Interest is the fee paid by a borrower to a lender for using the lender’s money. As a borrower, interest paid is an expense. But as a lender or investor, interest earned is income.
Almost all businesses will either invest or borrow money at some time. For example, most new businesses will need to take out a business loan to get the business up and running. A business might issue commercial papers as a way to borrow money for some type of capital project. Similarly, a business might invest their profits in some type of savings account or other investment.
On a personal level, almost all people invest and borrow money at some time in their lives. People take out student loans to pay for their post-secondary education, car loans to purchase a new car, or a line of credit to finance other purchases. To get their money to work for them, people invest money in a variety of investments, such as savings accounts, guaranteed investment certificates, treasury bills, and commercial papers.
Even governments need to borrow money. Have you ever thought about how the government of Canada or your provincial government goes about doing that? Although a government has many methods at its disposal to borrow money, a common method is to use treasury bills—in essence, borrowing the money from investors.
The bottom line is that money does not come free. In this chapter, you will explore the concept of simple interest, learn how to calculate it, and then apply simple interest to various financial tools.
Attribution
“Chapter 8 Introduction” from Business Math: A Step-by-Step Handbook Abridged by Sanja Krajisnik; Carol Leppinen; and Jelena Loncar-Vines is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.
“Chapter 8 Introduction” from Business Math: A Step-by-Step Handbook (2021B) by J. Olivier and Lyryx Learning Inc. through a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License unless otherwise noted.
