2.1 Introduction

Interest is the compensation one gets for lending a certain asset. For example, suppose that you put some money in a bank account for a year. Then, the bank can do whatever it wants with the money for a year. To reward you for that, it pays you some interest. The asset being lent out is called the capital.

In general, both the capital and interest are expressed in money. However, that is not necessary. For instance, a farmer may lend his tractor to a neighbour, and get a part of the grain harvested in return. In this course, the capital is always expressed in money, or called capital.