Chapter 3: Compound Interest and Compound Discount
Learning Outcomes
At the end of this chapter, you should able to:
- Define compound interest and compound discounts.
- Calculate compound interest and compound discounts.
- Compare nominal and effective interest rates.
An interest paid only on the principal is called simple interest. When the interest of each period is added to the principal in computing the interest for the next period, it is called compound interest.
A simple discount on an amount of transaction for t years at the discount rate of d is called a simple discount at a discount rate. When there is a compound discount at a discount rate, it is called a compound discount at a discount rate.
Both interest and discount rates may be converted into principal annually, semiannually, quarterly, monthly, weekly, daily, or continuously. The number of times or time period of interest is converted in a year, or compounded per year, is called the frequency of conversion. The nominal rate is the common unit used in the calculation of interest or discount rate.
