Business
The initial amount of money being borrowed or invested.
Principal
The fundamental characteristic of simple interest is that it's calculated only on this amount.
Interest is only calculated on the original amount (the principal).
Compound interest is often called this phrase, meaning interest is earned on both the principal and prior interest.
"Interest on Interest"
The financial decision that answers the question: "Where to put the money?"
Investment Decision
In the story "The Weight of the Master's Coin," the servant who invested ₱500,000 using compound interest was this numbered servant.
Servant 1
The percentage charged for borrowing or earned for lending, usually stated annually.
Interest
The formula for Simple Interest is I=P×R×T. What does the 'R' stand for?
Interest Rate
The final amount is calculated on the original amount plus any interest you've already earned.
Compound Interest
The financial decision that answers the question: "Where to get the money?"
Financing Decision
The total amount returned to the Master by Servant 3 after 5 years, who just kept the ₱500,000 in a vault.
₱500,000.00
The concept that "A peso today is worth more than a peso tomorrow."
Time Value of Money (TVM)
In the simple interest formula, what must the time period 'T' be expressed in?
Years
In the compound interest formula, the variable 'n' stands for this.
Number of times interest applied per time period
Buying equipment or stocks is an example of this type of financial decision.
Investment Decision
After 5 years, Servant 2's ₱500,000 grew to ₱700,000 using this type of interest.
Simple Interest
This term is also referred to as Present Discounted Value.
Time Value of Money (TVM)
The interest earned each year on a simple interest investment of P10,000 at 9% for 3 years.
₱900 (calculated as ₱10,000×0.09×1)
When interest is compounded quarterly, the value of 'n' is this number.
4
Borrowing from a bank or getting money from owners/investors is an example of this type of financial decision.
Financing Decision
The total interest Servant 1 earned on the ₱500,000 after 5 years compounded annually at 8%.
₱234,664.04
The duration (in years, months, or periods) over which the interest is calculated.
Time Period
The Total amount after 3 years for a simple interest investment of P10,000 at 9%.
₱12,700
After 3 years, the total interest for a compound interest investment of ₱10,000 at 9% is this amount.
₱2,950.29
Besides understanding interest and computing values, one learning objective is to exercise prudence in evaluating financial opportunities based on this concept.
Time Value (of Money)
The final total amount Servant 1 returned to the Master after 5 years.
₱734,664.04